Capital vs Interest help

Hi all,

I'm hoping that someone might be able to explain the below, I'm sure it's correct at the banks end and it's just my inexperience that needs addressing.

We bought our house in Dec 2020 for £220,000 with a £45,000 deposit - so we borrowed £175k from the bank.

I've worked out that over the last three years we've repaid approx £21,000 in monthly submissions.

My question, is that the mortgage balance still stands at £164,600 at present. So of the £21,000 I've paid back, is it the case that only £10,400 of this has gone on the capital, with £10,600 hoovered up by interest?

I spoke to the bank, and they tell me that capital vs interest as a split of the monthly payment is approx 50/50, but it should be weighted slightly in favour of capital - which is not in line with my repayments above.

I'd be really grateful if anyone can tell me if the above sounds about right. I'm aware that the first years of a mortgage are the most painful, but seeing such a tiny dent made in the capital is depressing!

Comments

  • ACG
    ACG Posts: 23,622
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    I am a Mortgage Adviser
    You should note that this site doesn't check my status as a mortgage adviser, so you need to take my word for it. This signature is here as I follow MSE's Mortgage Adviser Code of Conduct. Any posts on here are for information and discussion purposes only and shouldn't be seen as financial advice.
  • amnblog
    amnblog Posts: 12,388
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    This is how it works.

    Whilst you owe the Lender money they will charge you interest on the balance.

    Over the period of your mortgage they will want you to repay the capital and the interest until you owe zero at the end of the final month.

    They need to make the monthly payments affordable to you and this is how they do it.

    Assume you are borrowing £175,000 over 25 years.

    It appears the mortgage rate you have enjoyed over the past 34 months or so is around 2.01%.

    If you were the pay back the capital evenly over 300 months (25 years) that would be £583 a month.

    If you started in January 2021 paying back £583 a month and monthly interest on £175,000 that would be around £894 a month.

    Instead the Lender works it out so you pay less capital back in the early years whilst the interest costs are higher.
    In the final years the capital is paid off faster as the interest cost is lower.

    Currently you need to be paying around £288 interest each month before you cover any capital.

    With most Lenders, you have the option, if you want to get your capital down faster to overpay by up to 10% of your outstanding balance per year.

    Currently you need to be paying around £288 interest each month before you cover any capital.


    I am a Mortgage Broker

    You should note that this site doesn't check my status as a Mortgage Broker, so you need to take my word for it. This signature is here as I follow MSE's Mortgage Adviser Code of Conduct. Any posts on here are for information and discussion purposes only and shouldn't be seen as financial advice.
  • rigby44
    rigby44 Posts: 36
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    edited 23 November 2023 at 11:54AM
    amnblog said:
    This is how it works.

    Whilst you owe the Lender money they will charge you interest on the balance.

    Over the period of your mortgage they will want you to repay the capital and the interest until you owe zero at the end of the final month.

    They need to make the monthly payments affordable to you and this is how they do it.

    Assume you are borrowing £175,000 over 25 years.

    It appears the mortgage rate you have enjoyed over the past 34 months or so is around 2.01%.

    If you were the pay back the capital evenly over 300 months (25 years) that would be £583 a month.

    If you started in January 2021 paying back £583 a month and monthly interest on £175,000 that would be around £894 a month.

    Instead the Lender works it out so you pay less capital back in the early years whilst the interest costs are higher.
    In the final years the capital is paid off faster as the interest cost is lower.

    Currently you need to be paying around £288 interest each month before you cover any capital.

    With most Lenders, you have the option, if you want to get your capital down faster to overpay by up to 10% of your outstanding balance per year.

    Currently you need to be paying around £288 interest each month before you cover any capital.


    Thank you, thats very helpful.

    We are currently overpaying by a few hundred quid each month, and in the new year will put down a lump sum with the idea being that we take advantage of the current interest rate (2.1%) which we have until Dec 2025. At that point we’ll get whacked on a new deal like everyone else.

    Am I correct in assuming that all and any overpayments (whether setup monthly or individual lump sums) are not subject to interest and come straight off the capital?

    As I say, we want to try and take it down as much as possible over the next 2 years, via monthly overpayments and probably 6x additional lump sums over that period too.

    PS. Natwest allow up to 20% overpayment without fee annually, and I dont think we’ll get near approaching that figure.
  • amnblog
    amnblog Posts: 12,388
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    With NatWest you benefit immediately from overpaying directly to your mortgage. If you make an overpayment or lump sum payment then the amount you owe, and the amount of interest you pay, is reduced immediately.
    I am a Mortgage Broker

    You should note that this site doesn't check my status as a Mortgage Broker, so you need to take my word for it. This signature is here as I follow MSE's Mortgage Adviser Code of Conduct. Any posts on here are for information and discussion purposes only and shouldn't be seen as financial advice.
  • amnblog said:
    With NatWest you benefit immediately from overpaying directly to your mortgage. If you make an overpayment or lump sum payment then the amount you owe, and the amount of interest you pay, is reduced immediately.
    Thanks, sorry if the question isnt relevant - but overpayments go on the capital only?
  • amnblog
    amnblog Posts: 12,388
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    You mean due overpayments pay towards interest?

    By definition - no. You are already covering all the interest with your agreed monthly payment. Therefore anything extra goes to capital.
    I am a Mortgage Broker

    You should note that this site doesn't check my status as a Mortgage Broker, so you need to take my word for it. This signature is here as I follow MSE's Mortgage Adviser Code of Conduct. Any posts on here are for information and discussion purposes only and shouldn't be seen as financial advice.
  • Hoenir
    Hoenir Posts: 1,254
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    Overpaying the mortgage is like rolling a snowball. To start with the reduction in monthly interest charges seems very small. Over time the momentum will grow and real inroads will be made into reducing the capital balance owed. Think of overpaying as a marathon not a sprint. 
  • In the early years of a mortgage most of the repayments cover the interest and only a small bit of capital. So for example after 5 years of a 25 year term you would still owe about 85% of the original amount borrowed.
    It's why even relatively small over payments in the early years can take several years off the time taken to repay it.
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