how early mortgage repayment save money?

justme111

No, I'm not totally stupid ( although it may be difficult to believe reading the heading of this post:D ). Surely it does, I just can not understand how exactly it happens.
I have an idea that when the one takes mortgage the following thing happens : the amount of money lended added to an interest that would the money lended incur in 25 years time and the sum of it is divided by 300 ( 12 monthsx25 years).
So if the one pays the mortgage off early he would be paying the interest that he would have incurred in 25 years anyway. Please tell me what I miss in this equation. Thanks

kogsawelly

Hi Justme, You would only pay interest for as long as you had the mortgage. say you borrow £100,000 over 25 years. Each month you pay interest on the loan plus a part of the original loan for a repayment mortgage or just interest for an interest only mortgage. If you come into money after 1 year and decide to pay off your mortgage, you would have only been paying interest for 1 year. Once you pay back the loan, there is no interest to pay - you have then saved 24 years of interest.
OK?

cattie

If you pay the mortgage off early you only pay the interest up to the day that you redeemed the mortgage. So if you had a mortgage over 25yrs but cleared in in 10yrs you would have saved 15yrs worth of interest effectively.

Any amount of reasonably regular overpayment can reduce the amount you end up paying in interest quite considerably as the term of the mortgage reduces due to paying more than the contracted amount to the lender.

globalds

No the interest is compound
Some one much smarter than me will come and explain it better ...But i will have a go ...This is sure to mess your mind up ..
Lets say you go and lend £100,000 for 25 years ....at ...5 %...That would mean the debt would increase by £5000 in one year if you paid nothing off .
If you paid £6000... a year..(£500 a month) in mortgage payments ..at the end of year 1 ,you would still owe £99,000
The next years interest is calculated on this debt still owed so the first £4950 of your £6000 will go to pay the interest and you will pay £1050 off your original debt in year 2....This will continue every year with slightly more of your £500 monthly mortgage payment actually paying off the debt.
Now if you paid £15,000 off the first year ...The interest charged on debt would only be £4500 allowing your next and future mortgage payments to pay more of the actual debt and less off the interest that the debt is costing.
....I tried ..And hope it helps ....It is what I am doing at the moment ....This afternoon I transfered some savings into my mortgage account ...
As my mortgage is over a fixed time what i observe is my monthly payments going down ....Although interest rates have gone up over the last year ..my payments haven't ..if anything they have dropped by about £20.00 a month.

*EDIT I was right ...Other folk will do a better job of desribing it *