Repayment and Interest amounts

outb

Hello,

Long time reader/lurker first time poster.

Apologies for the simple and probably stupid question however I'm a little confused about something:

I read all the time that "In the first few years of the mortgage, you pay proportionally more interest, so the debt only reduces slowly"

If / When you re-mortgage to a better deal does this process start again and you pay higher interest and less repayment?

Does that mean that essentially if you select a 2 year fixed mortgage every 2 years you are always paying the highest interest amount on the borrowed amount and that proportion of Repayment vs Interest never balances out?

For example:

Year 1: I take a 30 Year Mortgage out fixed for 2 years. I pay mostly Interest over this time.

Year 3: My fixed Period is up so I remortgage for a lower interest rate. I take this mortgage over 28 years with another fixed 2 year period.

I continue this process over and over until the mortgage is paid.

Will I always pay the high interest proportion in my repayments?

getmore4less

The amount of interest you pay depends on the amount borrowed.

it is the same in year 3 of a 30 year mortgage as it is in year 1 of a 28 year mortgage that replaces the original 30 year one.


Read up on Amortization.

[Deleted User]

It simply means that each month you pay a mortgage, more comes off the capital and less interest is paid, as the balance reduces.

AnotherJoe

outb wrote: »

Hello,

Long time reader/lurker first time poster.

Apologies for the simple and probably stupid question however I'm a little confused about something:

I read all the time that "In the first few years of the mortgage, you pay proportionally more interest, so the debt only reduces slowly"

If / When you re-mortgage to a better deal does this process start again and you pay higher interest and less repayment?

No, not if you keep the term the same as you had left when you remortgage.

Does that mean that essentially if you select a 2 year fixed mortgage every 2 years you are always paying the highest interest amount on the borrowed amount and that proportion of Repayment vs Interest never balances out?

No, not if you keep the term the same as you had left when you remortgage.

For example:

Year 1: I take a 30 Year Mortgage out fixed for 2 years. I pay mostly Interest over this time.

Year 3: My fixed Period is up so I remortgage for a lower interest rate. I take this mortgage over 28 years with another fixed 2 year period.

I continue this process over and over until the mortgage is paid.

Will I always pay the high interest proportion in my repayments?

No.
Look at it this way, you borrow £100k (all sums pretty crude to make it simple).
Start of the mortgage your fixed repayment is paying the interest on £100k plus an amount to decrease that £100k. Lets say interest is 2%, and you are paying £3000 a year.
So in year one of the £3k you've paid, £2k is interest, and £1k is off the £100k leaving £99k.
So start of year 2, you owe £99k. Your same fixed repayment now pays off the now £1,980 interest and £1020 off what you owe.
So now you owe £97980 so the interest due is a but less so more of your £3000 goes towards paying off the capital.
In the very last year, say you owe now £2,950. Well theres a bit of interest on that, but not much about £60 so it comes to about £3,000 all in, so your £3,000 payment pays it off and nearly all that payment is the capital.

There's nothing magical about why you start with paying mostly interest, its simply because you owe a lot so there's more interest. As you pay it down, the amount of interest is less just because you owe less. so therefore more of your payment pays the capital.

p.s. this by the way is why overpaying is so powerful, because every time you overpay you diminish the amount of interest payable, which means more of your payment goes to repaying the capital which in turn reduces the interest owed, etc, positive feedback in effect.

kingstreet

Keep on going back to the original term = bad.

Allowing for the years that have passed and setting shorter term = good.

outb

Thank you all for the very quick and informative replies. I do currently overpay and will continue to do so for as long as I am able to.