How is your mortgage balance calculated?

ALaw94

Can someone please explain how your total mortgage balance is calculated? For example if you have a fixed rate for an initial term of 5 years which reverts to a variable rate for the remainder of the term - how can you calculate the total amount owed without a consistent interest rate? Thanks 

davidmcn

You can't, without knowing what the rates are over the relevant periods. Do you have a specific problem?

ALaw94

davidmcn said:

You can't, without knowing what the rates are over the relevant periods. Do you have a specific problem?

In the context of remortgaging - you need to know how much is still owed on your existing mortgage. So how is this calculated? 

Similarly in working out your equity if looking to sell - you would first need to know how much you still owe on the mortgage? Thanks 

davidmcn

If you mean how do you get the figure you use for budgeting a remortgage or sale, you don't need to calculate an exact figure (and you can't anyway until you know the completion date), you just estimate it from the recent balance of your mortgage account. Part of the process is the solicitors getting a redemption statement for a figure calculated to the actual completion date.

eddddy

ALaw94 said:

davidmcn said:

You can't, without knowing what the rates are over the relevant periods. Do you have a specific problem?

In the context of remortgaging - you need to know how much is still owed on your existing mortgage. So how is this calculated? 

Similarly in working out your equity if looking to sell - you would first need to know how much you still owe on the mortgage? Thanks 

The simple answer is, if you're redeeming your mortgage because you're remortgaging or selling - you (or your solicitor) tells your mortgage lender what date you want to redeem the mortgage, and the mortgage lender tells you how much you will owe on that date.

Or if you're thinking of selling or remortgaging, and want an idea of how much you owe - look at a recent mortgage statement or ask your mortgage lender.

You don't generally need an accurate figure in advance. For example, if you owe £87,467.61 on your mortgage, you'll probably remortgage with another lender for £85,000 or £87,000 or £90,000 anyway.

Thrugelmir

Can you view your mortgage account online? 

greatcrested

The balance remaining on your mortgage is calculated on a daily basis, dependant on what payments have been made up to that date.

During the first 5 years while on a fixed rate, you will be paying £A per month, some of which will be an interest payment, and some (a small amount) will pay off part of the capital you borrowed. On any given day during those 5 years, a calculation will be made which will give the amount of loan paid off and hence amount outstanding.

During the subsequent 20 years (assuming you remain on the lender's variable rate) you will pay £B per month which may change to £C or £D from time to time.

But again, on any given day the lender will calculate how much of your loan has been paid off.

It is virtually impossible for you to do these calculations yourself, but your statements will give a figure for the date the staement was produced. Or you can ask your lender to give you a calculation for any specific date.

If re-mortgaging, guess what date aproximately you think the re-mortgage will complete and your lender will estimate your outstanding loan for that future date, assuming you continue to make payments until then.

pinkteapot

Your lender can tell you your balance today, and your balance on a given date in the future. Ask them.  

AdrianC

Very simplistically: Let's the interest rate is a nice round 3.65% per year, so 0.01% is added to the outstanding balance per day. If the interest rate changes, then the new rate is used for calculation from the date of the change - so in the year you'll have 231 days at X%, then 134 days at Y%.

In practice, it's more complex than that, because of compound interest - you pay interest on the total debt, including the interest, not just on the original borrowed sum. There's various compound interest calculators on the web...

princeofpounds

The calculations are called amortization. Google it if you like. They are not that complicated if you are a mathematician, but they do require quite a bit of computation so typically it's done with a specialist calculator or computer. As everyone else has said, just ask your mortgage lender as they will have all this built into their system.

The theoretical change in rates in the future, when your fixed term ends, does change the estimated amount of your future mortgage payments. It doesn't fundamentally change the underlying amortisation of the principal amount (the stock of money you have borrowed, minus any repayments you have made over and above interest payments). When you buy a mortgage like that, there is always an illustration of how your payments will change in future, but that's just an assumption based on a current standard variable rate.

AdrianC

princeofpounds said:

The calculations are called amortization.

...or even "amortisation", this side of the Atlantic.