Mortgage interest

chrisr123

Hi there, a bit of help please. Bear with me as I havnt got a clue.
Im a first time buyer but need a bit of help understanding how mortgages work. 

Hypothetically, if the house I’m looking to buy is £190,000. I get a mortgage roughly paying £750 a month for 30 years, so the total paying back including interest is £270,000.
Say if after 5 years, I want to sell it and the house is worth £200,000 and I’ve paid off £45,000 in those 5 years.
So the outstanding balance including interest is £235,000. 

Would I be £35,000 out of pocket?
Is that how it works? I’m sorry if it’s such a stupid question. Any help would be greatly appreciated, many thanks 

nekr0mantik

I hopefully am not wrong as I am also new to this but when you sell your property, if its worth £200,000 then the money you get from the sale will pay off the remaining mortgage amount minus the interest. Interest is charged per month I think so you dont pay up front for the interest unless you are still paying off that mortgage and not selling. 

MaryNB

chrisr123 said:

Hi there, a bit of help please. Bear with me as I havnt got a clue.
Im a first time buyer but need a bit of help understanding how mortgages work. 

Hypothetically, if the house I’m looking to buy is £190,000. I get a mortgage roughly paying £750 a month for 30 years, so the total paying back including interest is £270,000.
Say if after 5 years, I want to sell it and the house is worth £200,000 and I’ve paid off £45,000 in those 5 years.
So the outstanding balance including interest is £235,000. 

Would I be £35,000 out of pocket?
Is that how it works? I’m sorry if it’s such a stupid question. Any help would be greatly appreciated, many thanks 

No. You won't be out of pocket by that amount. 

You don't owe £270k. Interest is added monthly, not all at the start. That's only what you will pay if it takes you 30 years to pay the mortgage off and your interest rate doesn't change.

If you overpay, you will reduce the balance faster and the total interest you pay will be less.
If, at the end of your initial say 2 or 5 year fix, the interest rate changes, the amount of interest you pay will change.
You could decide, when remortgaging after the 2 or 5 years, to extend the term of your mortgage to reduce the monthly payments. This will increase the total amount you'll pay because you pay interest for longer and the balance doesn't reduce as fast. 

When you get your mortgage you'll see two transactions each month. The first is the £700 deducted from the outstanding loan (which started at 190k), the second is the interest added.
Monthly interest = outstanding balance x annual interest rate / (days that year /days that month).

The first month is usually a bit messy but for the purpose of the calc let's say it's straightforward.
You pay £700 in March 2022 and the balance reduces to £189,300. Say your interest rate is 2%.

Interest added = 189,300 x 0.02 / (365/31) = £321.55

Now your outstanding balance has gone up to £189,621.55. That's what you owe the bank at the end of March 2022.

ETA: However, you can't just sell your house that month and pay the bank £189,621 to get out of your mortgage. If you are on a fixed interest rate you will pay an early repayment charge for overpaying on your mortgage during the term of the fixed rate (above the 10% overpayment allowance provided by most banks). So if you sell your house right away and don't move the mortgage to another property, you don't have to pay anymore interest but you will have to pay an ERC if on a fixed rate.

Thrugelmir

Plug the numbers into this. Ignore the $ signs. Assume it's £'s. 

https://www.amortization-calc.com/