Basic help re calculations

gemstars

Hello!

I'm trying to compare potential mortgages on a new home for the best deal, but I'm having difficulty understanding the calculations. The MSE comparison has given me the following;

Loan Value: £200,000
Rate: 1.89%
Set up fees: £1,230
Monthly payment: £837 (for 28 months up to £250 cashback)
MSE total cost: £10,460.

Could someone help me understand how the search generated the the monthly payment and total costs above? Once I understand how to do the manual the calculations I'll be able to do some comparisons.

Thanks
Gemma

YHM

Gemma

Appreciate you may want to do some digging yourself, but I'm confident it would be in your interests to use a broker to source a mortgage for you. They will be able to guide you on all the costs etc.

In basic terms to answer to your question, you must have put a term (length) in or the MSE comparison may use a preset 25 years for comparable purposes.

gemstars

Thanks YHM,

I did put a term length in, but unless I misunderstand, the monthly payment in the MSE comparison tool is calculated on the first year only.

I will be going for a 2 year fixed term so what I want to be able to do is calculate the total cost for me (including set up fees) for the mortgages on offer over that 2 year period, but in order to do this I need to understand how the monthly payment and total cost figures are calculated.

YHM

Hi Gemma

No the monthly payment is basically calculated by using the mortgage balance, the interest rate and the term. This would be the monthly cost that lasts for as long as the product length. So if the above is a 2 year fixed rate, then the monthly cost will remain for the 2 years you are fixed.

As I say, if you instruct a broker, they will consider the calculations to ensure, that for instance if you paid a £999 fee for a 2 year fixed rate, that you were to recover at least the £999 initial outlay in interest savings.

FormulaDriven

If you literally want to know the maths behind the monthly payment, it assumes that you make 300 payments at the quoted interest rate (300 months = 25 years), with the first payment occurring exactly one month after the loan is made. 1.89% / 12 = 0.001575 to get the monthly rate. Then the magic formula is:

200000 x 0.001575 / (1 - (1.001575)^(-300)) = 837.04.

I'm not sure how the total paid figure is derived.

FormulaDriven

And in case it's not obvious, the formula is:

LOAN AMOUNT x r / (1 - (1+r)^(-n))

where r is the monthly rate (headline rate divided by 12) and n is the term in months. ^ means "raised to the power of"

YHM

I have a calculator that does that

getmore4less

If you want to compare 2 mortgages add the fees make the monthly payments the same same and see what's left.

If you want to understand the basics on how a payment is calculated look up amortization.



Term is only relevant for settings a payment the real calculation are based on the actual payments.

Beware the MSC calculations they can be misleading.

Once you understand the basics a simple calculator can do just about any comparison you need, for something a little more complicated spreadsheet has them builtin.

gemstars

Just wanted to pop back and say thanks for the advice.

I've found the best deal for me.