Interest query

onthefence12

I am thinking about if it is better for me to rent or buy a small flat. I have a question about the interest you pay on a mortgage. As an example, say I take out a £50,000 mortgage over 25 years and the interest rate is 4% and don't I switch mortgage at anytime.

Putting these numbers into the thisismoney calculator, it says that the total charge for credit will be £29175.53 and overall I will end up paying £79175.53. If I decide to sell after 5 years will I still have to pay £29175.53 interest? If I sold for £50000 would I have lost money?

Obviously I think I have misunderstood something as this is a really poor deal and it wouldn't be so popular to buy if that where the case. Please can you try and explain, or point me to a source that explains it.

Thanks very much for your time and help

Lokolo

£29,175 is the interest over a 25 year period. Over a 5 year period its about £6,000. You don't get charged interest upfront.

You have a mortgage of £50,000. Each month you pay a certain amount against the mortgage. This covers the interest owed (approximately £170 at 4%), plus an additional amount which will reduce the £50,000 down.

The additional amount you pay to reduce your £50,0000 over 25 years is £167 a month.

onthefence12

Ah thanks. So I would need to sell for at least £56000 after 5 years in order to not have lost money?

booksurr

onthefence12 wrote: »

Ah thanks. So I would need to sell for at least £56000 after 5 years in order to not have lost money?

in a purely financial sense yes, but that is not the full answer to your question

if you buy and sell after 5 years you will have paid £6,000 "rent" for living there in the form of interest paid on the loan. If you sell for 56k then you have got your money back and have lived there rent free for 5 years, If you get less than 56k on selling you have paid "some" rent for living there for 5 years

if you rent for 5 years you have paid 5 years of rent and won't get a penny of it back.

chalk and cheese comparison

economic

dont forget inflation!

hazyjo

Also don't forget you would have paid some of the loan off. My mortgage was around £120k and will be around £105k next year (after 4 years) when I either remortgage or sell.


If I sold for the price I bought, I wouldn't have the full amount outstanding on the mortgage still.


If you're talking literally getting back what you've paid, yes, you're right - but if you're talking not to be in negative equity, you have to take into account the mortgage itself will have reduced.


Jx

dc197

onthefence12 wrote: »

Ah thanks. So I would need to sell for at least £56000 after 5 years in order to not have lost money?

No.
That would only be true if your deposit was zero and the initial cost of the house was £50,000.
You don't say how much the house will be, only how much you need to borrow.
If you buy the house now for £70k, you borrow £50k, and later sell it for £57k, you have still lost money.

hazyjo

dc197 wrote: »

No.
That would only be true if your deposit was zero and the initial cost of the house was £50,000.
You don't say how much the house will be, only how much you need to borrow.
If you buy the house now for £70k, you borrow £50k, and later sell it for £57k, you have still lost money.

lol can't believe that didn't even cross my mind, was thinking it was the total... of course the deposit needs to be taken into consideration :facepalm:!


OP - are you still there? Shout if there's anything you're not clear on.


Jx

[Deleted User]

You need to estimate the gains and losses over 5 years:

gains: price rise + mortgage capital repaid + money you would have spent on rent (don't forget it will normally rise over time).

losses: money paid to mortgage + buying and selling costs (solicitors, mortgage fee, estate agent etc) + costs to do up/maintain.

As long as the mortgage + maintenance is not too much more than the rent would have been, and as long as the prices don't fall, it's a case of when rather than if you reach your breakeven point. If you reach breakeven before you sell, then you are ahead.

For me, I plan to sell after 5 years, and estimate I will breakeven around 3, so by 5, I should be ahead.

[Deleted User]

Here's a calculator for renting vs buying that shows the breakeven point:

http://www.telegraph.co.uk/finance/property/house-prices/10373797/Should-you-rent-or-buy.html

Obviously use at your own risk! This is based on someone else's estimates of price rises etc, and they don't have crystal ball.