Clarification on Martin guide

slhqoue

From Martin's guide:

Your repayments are calculated so you’ll have repaid all the debt and the interest over the term you agree (eg, 25 years).

This has a strange effect. In the early years, your outstanding debt is larger so most of your monthly repayments go towards paying the interest. Gradually, as you reduce what you owe, most of your repayments go towards paying off the debt.

For example, on a £100,000 mortgage at 5%, after 10 years you’ll have repaid £70,000 but only reduced what you owe by £26,000. Yet after a further 10 years, paying another £70,000, now you’ll reduce the debt by a further £43,000 because less interest is accruing each year.

If you can a afford to pay the debt more quickly, though it would mean a higher monthly payment in the short term, you could save serious cash over the life of the loan.

Many people, once they realise this, then worry that if they ever remortgage to another deal they’ll lose all the work they’ve put in to decreasing what they owe.

This isn’t true. Provided you keep the same debt and the same number of years left until it ends (ie, you have 14 years left to repay and you still intend to repay it in 14 years), then it stays the same.

I'm confused about what 'it stays the same' refers to in the final sentence. Also, if you sell a property having paid the mortgage for ten years having repaid £70,000 but only reducing what you owe by £26,000, won't you lose the difference (£44,000) when you sell it?

glosoli

to keep matters simple, any of the capital that you pay off becomes equity in the property.

getmore4less

slhqoue wrote: »

....

This isn’t true. Provided you keep the same debt and the same number of years left until it ends (ie, you have 14 years left to repay and you still intend to repay it in 14 years), then it stays the same.

I'm confused about what 'it stays the same' refers to in the final sentence. Also, if you sell a property having paid the mortgage for ten years having repaid £70,000 but only reducing what you owe by £26,000, won't you lose the difference (£44,000) when you sell it?

that £44k went the moment you paid it

its called INTEREST.

have a look at the monthly interest and capital over the term of a mortgage this calculator does it.

http://www.whatsthecost.com/mortgage.aspx
stick some numbers in and press calculate->details


What it means is a 14y mortgage is the same if it is new one or the last 14 years of a longer one.

Strummer22

slhqoue wrote: »

Many people, once they realise this, then worry that if they ever remortgage to another deal they’ll lose all the work they’ve put in to decreasing what they owe.

This isn’t true. Provided you keep the same debt and the same number of years left until it ends (ie, you have 14 years left to repay and you still intend to repay it in 14 years), then it stays the same.

I'm confused about what 'it stays the same' refers to in the final sentence.

It means that if you've got 14 years left on your mortgage term and £70,000 left to pay, and you decide to remortgage (while keeping the 14 years the same), with your new lender you will still have £70,000 left to pay over 14 years.

Having remortgaged though it'd hopefully be at a better interest rate so your monthly payments would be lower.

slhqoue wrote: »

Also, if you sell a property having paid the mortgage for ten years having repaid £70,000 but only reducing what you owe by £26,000, won't you lose the difference (£44,000) when you sell it?

If you're unlucky enough that house prices haven't risen, yeah. It's a loan. It's not supposed to be free! But let's consider the £100k mortgage, and the house was worth £130k when you bought it. Say ten years later it's increased in value to £160k. So when you bought it, you had £30k equity. Now you've paid off £26k of the capital and the house value is up by £30k. You now have £86,000 of equity in your home - which isn't so bad.

But in the current financial climate if you've been paying 5% on your mortgage for 10 years then something's gone wrong. You either have a bad credit history, got stuck in negative equity, or are a sucker. You probably should've remortgaged. The figures look much less appalling if you consider a reduction in rate to a more typical 3%.

AnotherJoe

slhqoue wrote: »

Also, if you sell a property having paid the mortgage for ten years having repaid £70,000 but only reducing what you owe by £26,000, won't you lose the difference (£44,000) when you sell it?

As pointed out, you've lost it already, its interest, and it's the price for having a mortgage. If you borrow £100,000 at say 2% then first year you "lose" £2,000 (roughly) because that's 2% of £100,000.

If you go through a mortgage calculator, its eye boggling how much money you spend on interest over the life of the mortgage. Which is why overpaying is such a good thing (if you can) as it reduces the overall amount of interest you pay disproportionately. Every pound you repay means interest on a pound saved for each year of the remaining term. Say iyou repay a lump sum of £1000. That's saved you the interest on that mortgage of £1000 not just next year but the year after and the year after that, for the life of the mortgage, plus if you keep payments as they were ,you are additionally reducing the term of the mortgage. So the effect is multiplied.