Help with mortage calculations

Ratlee

Hi guys,

I'm doing a final review of all the mortgage documentation and something doesn't sit right with me.

As it now stands, we aim to borrow £166,500 from Barclays. The projection shows that we would be repaying this amount for 20 years, of which 5 years (61 payments) with a fixed rate of 2.44% and further 15 years (179 payments) with a variable rate of 4.24%.

Assuming no charges whatsoever, if we were to repay whole sum of £166,500 over 20 years, that would mean 240 monthly repayments of £693.75.

When I add 2.44% and 4.24% rates for 5 and 15 years respectively, I get:

61 payments of £710.67 and 179 payments of £723.16.

This altogether would mean that we would have to repay £172,809

Could you please help me with figuring out why on the projection they have sent the repayments are so much different? Perhaps I'm just doing something wrong with my calculations, but would like to be 100% clear on this before I agree on anything.

As it currently stays, the rates suggested by them are:

61 payments of £877.43 at a fixed rate of 2.44% and 179 payments of 992.66 at a variable rate of 4.24%. This would mean that for some reason they calculate my base monthly repayment (without any % added) at £856.53 and 952.28 respectively, which doesn't make any sense at all??

Perhaps I am just daft, or using wrong calculations over here, but could please somebody help me figure this out? Why instead of £172,809 I would need to repay £231,324.37? That's a £60,000 difference and frankly it scares me quite a bit. What do I not see?

Cheers,
Ratlee

Farmerbob

The payment are not calculated by splitting the capital over equal payments then adding the interest on to each payment, it’s charged on the whole balance whatever it is on each month you need to make a payment.

Each month the bank will take a payment to cover the interest and some capital. As the capital balance reduces the payment each month is less interest and more capital each month your forgetting that in the beginning that early on the interest is a bigger part of the payment early on and gradually decreases. If you google an amortisation calculator you be able to see a breakdown

amnblog

The interest element in the lending is not constant every month as you are calculating it.

Clearly 2.44% of £166,500 in year one will be much higher than 4.24% of £8,400 on year 20.

If you tried to pay off the capital in 240ths your initial payments would be too high. The Lender therefore adjusts the capital paid to be lower in the early years, rising over the term. This keeps the monthly payments constant.

If you look at the back end of your figures you should see a chart showing how capital is being reduced.