How is interest per month calculated

kenzie123

Hello,

This may be a stupid question - BUT can someone please explain to me how our mortgage interest rate is calculated per month?
We are on a 1.94% interest rate, 3 year fixed.
Each month we pay £953.39, and of that, interest taken is (on average) £384.
So this means around 40% of our monthly payment is taken off for interest.
Where does the 1.94% come from?

thanks in advance!

D.L

1.94% is an annual rate that represents how much interest your loan would accrue WITHOUT any repayments, e.g. if you had a £100,000 loan you would accrue £1,940. These interest rates are used as it allows you to make comparisons of the cost of the loan ignoring the mortgage term you have chosen, the amount you choose to overpay, etc. However, you do pay back your lender each month, both the interest accrued and some additional amount towards the actual sum borrowed. Interest is calculated on a daily basis so whenever you make a repayment the daily interest added (equivalent to 1.94% annually as described above) is applied to a lower sum. As you repay the same amount every month even though the balance is going down, every month you end up paying more towards the principal and less towards covering interest. Because of this, in the early years you pay much more towards interest (currently you say about 40%) and this will go down over time.

Sensory

Interest is usually calculated daily, so after multiplying your outstanding balance by 1.94%, the result is divided by 365 or 366, each and every day (#1).

Interest is usually applied monthly, so those daily interest calculations over the course of a month are added together, and then applied to the outstanding balance, once a month.

Your minimum monthly repayment is a fixed amount, but covers at least the monthly interest charged in addition to repaying part of the capital, thereby gradually reducing the outstanding balance. The lower your outstanding balance, as each day goes by (#1), the less interest you pay overall.

getmore4less

The rate is one of the stating variable along with amount and term to work out the payment.
As said there are various ways of doing it daily monthly annual and then there is the compounding period that is when the interest gets added to the debt.
many mortgage these days are daily interest monthly compounding
That means they calculate the interest daily and add it monthly.
for most people that the interest gets added the same day as the payment so a lot of the numbers disappear as the balance just goes down on that day..
(my mortgage the interest is added on the 1st and payment is on the 16th)

In practice you can take the amount borrowing and use the annual rate/12 to get the monthly interest
that will be an approximation to what happens on the account as not all months are equal and there are weekends and BH that can change the number of days between adding the interest.
All the maths of mortgages is wrapped up in a process call amortisation which is what the calculators use to get your estimated mortgage payments from the amount rate and term.
There are only 4 variable for a mortgage so you can work stuff out from limited data
for yours we have rate 1.94% payment £953 interest £384.
depending how accurate the interest part is from that I can approximate the amount outstanding £384/(1.94%/12) = £237,500
Then from that I can work out the remaining term approx 26 years 7 months with a £953 payment on 1.94%(assumes no overpayment)
reality is I see you are nearing the end of a 3y fix on a 30y term so more like 27 and a bit years left, which implies higher borrowing  more like £260k at the start and will have around £240k now and the monthly interest is closer to £390-£394
if you have been overpaying that will explain the lower numbers from the initial calcs

kenzie123

getmore4less said:

The rate is one of the stating variable along with amount and term to work out the payment.
As said there are various ways of doing it daily monthly annual and then there is the compounding period that is when the interest gets added to the debt.
many mortgage these days are daily interest monthly compounding
That means they calculate the interest daily and add it monthly.
for most people that the interest gets added the same day as the payment so a lot of the numbers disappear as the balance just goes down on that day..
(my mortgage the interest is added on the 1st and payment is on the 16th)

In practice you can take the amount borrowing and use the annual rate/12 to get the monthly interest
that will be an approximation to what happens on the account as not all months are equal and there are weekends and BH that can change the number of days between adding the interest.
All the maths of mortgages is wrapped up in a process call amortisation which is what the calculators use to get your estimated mortgage payments from the amount rate and term.
There are only 4 variable for a mortgage so you can work stuff out from limited data
for yours we have rate 1.94% payment £953 interest £384.
depending how accurate the interest part is from that I can approximate the amount outstanding £384/(1.94%/12) = £237,500
Then from that I can work out the remaining term approx 26 years 7 months with a £953 payment on 1.94%(assumes no overpayment)
reality is I see you are nearing the end of a 3y fix on a 30y term so more like 27 and a bit years left, which implies higher borrowing  more like £260k at the start and will have around £240k now and the monthly interest is closer to £390-£394
if you have been overpaying that will explain the lower numbers from the initial calcs

thank you so much
this is so accurate!
I'm trying to work out an estimate of the interest each month - can you please explain the calculation for that?

1.94% mortgage
our monthly payment is £953.39

any help appreciated!
thank you

getmore4less

I use this amortisation calculator for the simple ones.
http://www.whatsthecost.com/mortgage.aspx
just stick in your amount, rate and term.
as that works for full years if you set  interest only you can put in a payment(nearest £)
that will get you closes enough.
Then look at the details and it will show the results month by month.
you can then do things like add a regular overpayment and see what difference it makes.
if you can do spreadsheets, look up the maths functions PMT as a start.thats the one that works out the payment from amount rate and term.

kenzie123

getmore4less said:

I use this amortisation calculator for the simple ones.
http://www.whatsthecost.com/mortgage.aspx
just stick in your amount, rate and term.
as that works for full years if you set  interest only you can put in a payment(nearest £)
that will get you closes enough.
Then look at the details and it will show the results month by month.
you can then do things like add a regular overpayment and see what difference it makes.
if you can do spreadsheets, look up the maths functions PMT as a start.thats the one that works out the payment from amount rate and term.

Thank you again - this is so helpful, this calculator is brilliant! 
very best wishes