Interest question

Wanttobedebtfree143

Hello

If this has already been covered can someone direct me to the post please?

I have been paying my mortgage now for 4 years payments are £521 per month and interest is about 4% total I borrowed is £85000. 4 years of £521 per month is about £25000 how ever my statement says I owe £73000 so I have only payed about £12000 off. If the interest is 4% surely that means the total I owe is £3400 and a total of £88400 owed but £521 x 12 months x 20 years is £125000 so I don't understand how it is so much owed when the interest rate is 4%. Can anyone explain how this works please? Thanks in advance

[Deleted User]

The proportion of your monthly payment which is interest is higher in the early years, as your balance is so much higher.

happytails

In the beginning, you owe more interest, because your loan balance is still high. So most of your monthly payment goes to pay the interest, and a little bit goes to paying off the principal. Over time, as you pay down the principal, you owe less interest each month, because your loan balance is lower. So, more of your monthly payment goes to paying down the principal. Near the end of the loan, you owe much less interest, and most of your payment goes to pay off the last of the principal.

Does that make sense?

ACG

Have a look at this website - http://amortization-calc.com/
It may help to see it worked out no a monthly basis. The figures on here will not be spot on, but they should be more or less right.

samsam89

It's known as front loaded interest. As a poster above has stated, your monthly payments at the start of your mortgage will be largely going towards interest. As you get further into the term of your mortgage, you start to make more of a dent into your actual mortgage balance. It's just the way it is. It ensures that lenders get their dues before you jump ship somewhere else and they end up having made very little profit.

Wanttobedebtfree143

So basically do I pay 4% of £85000 every year?

[Deleted User]

No. You'll paying an APR of 4% on the balance at any given time, which declines over time.

It's also not front loaded interest. That is something entirely different which is not allowed.

ACG

In a word, no.
Your Mortgage balance changes every day. You are paying 4% on the balance as it stands that day, but your balance increases slightly every day until you make a payment, then it drops. Then it creeps up again every day until your next payment.

Each payment you make, pays the interest for that month plus a little off the balance. The amount coming off the balance increases month on month.

glosoli

samsam89 wrote: »

It's known as front loaded interest. As a poster above has stated, your monthly payments at the start of your mortgage will be largely going towards interest. As you get further into the term of your mortgage, you start to make more of a dent into your actual mortgage balance. It's just the way it is. It ensures that lenders get their dues before you jump ship somewhere else and they end up having made very little profit.

Completely wrong information here.

Wanttobedebtfree143

Makes sense now thanks!

clairebeth

It will be calculated daily, but I think your confusion was that you thought you paid 4% on £85,000, making a total of £88400 and then you paid that total off over 20 years with no further interest added, am I right? So when you ask 'do I pay 4% every year?' This is basically correct, except it is calculated daily rather than yearly, and it is based on the current balance, (so, currently, 4% of £73,000 (your current balance) divided by 365 (days I the year) gives you your daily interest). Your interest rate will change of you either come to the end of the original discount offer and go onto the standard variable rate offered by your lender or, if you choose to apply for a lower rate through your current lender or another lender. Perhaps this is worth doing, if you reduce the rate of interest you can still pay £521 a month, but you will pay less interest and more capital and get that £73,000 down quicker and your daily interest charges will reduce quicker too.

But yes, you pay interest for the whole time you have a mortgage. If you look at your initial letter from your lender, it should have a bit that says 'this will cost you £125000 over 20 years', or similar.