Understanding Interest vs Capital mortgage repayment rate increase

Confused_Pigeon

I have had a 5 year fixed mortgage based on 25 years capital repayment projections to start with at a good old rate of 1.75%

At the end of that 5 year fixed rate period capital to interest payment ratio was capital 74% interest 26% which is fantastic.

Then renewed the fixed rate for 2 years this time at rate of 4.54% with the same lender for the 20 year period taking into account the past 5 years.

The 2 year fixed rate is now also coming to an end however to my surprise capital to interest payment ratio stayed the same for the whole 2 year period.

This time capital repayment was 39% and interest 61%. It feels like so little capital is being paid off and I dont understand the interest increase as the 1.75% mortgage rate increase to 4.54% doesnt equate to about 35% increase in interest vs capital payment.

To me it looks if I either move to another mortgage lender or keep fixing the mortgage for 2 years I will never pay much capital off and it will work out as a lot longer then 17 years to pay it off despite the 25 years projections.

Does anyone understand why such a huge increase in interest vs capital repayment when extending the fixed rate for the second time when the mortgage rate increase doesnt add up to explain the interest increase?

Rather then fix 2 years at the time is it worth fixing for 10 years in the hope capital vs interest repayments will increase over the years?

Appreciate any constructive responses that can clear this up for me. Tx

amnblog

If your interest rate is up 259% the ratio between the interest payment and capital repayment is bound to narrow.

BarelySentientAI

Why are you trying to achieve a particular balance of capital vs interest?  That seems like a very odd concern.

If you have a capital repayment mortgage with a 25 year term, then the capital will all be repaid at the end of that 25 year term.

If you now have 17 years left on the original 25 year term, then the capital will all be repaid after 17 more years.

You are confusing yourself with unnecessary mathematics.

tacpot12

I disagree that it is an odd concern. Certainly few people worry about the ratio of capital to interest, but more people should worry about it. Those that don't indicate that they don't know how their mortgage works. 

However, it is correct that the relative ratios of capital to interest has switched. I use the Loan Amortization template in Excel to model mortgages, and this confirms that the switch is correct, but also that your mortgage will be paid off over the term that your orginal mortgage was set to run for.

While the effect of the interest rate change over the last two years has been to reduce the amount of capital you are paying off substantially, it has changed the 'shape' of the capital payments over time. With the new rate, you will pay off more capital towards the end of your mortgage and less towards the beginning.

Overpaying your mortgage is now is more beneficial now (with a higher interest rate) than it was when you had the super low interest rate. It's time to overpay if you can. 

BarelySentientAI

tacpot12 said:

I disagree that it is an odd concern. Certainly few people worry about the ratio of capital to interest, but more people should worry about it. Those that don't indicate that they don't know how their mortgage works. 

It's a very odd concern, especially given the OP's questions - asking whether they should get a longer fix in the "hopes" that capital vs interest changes during the fixed term, and worrying that it won't be paid off at the end of the term unless they take a long fix.

And you really don't need to be delving into capital ratios to know that you pay more interest when the balance is higher.  I know exactly how my mortgage works, but have no interest whatsoever in the present capital/interest ratio.

tacpot12 said:

Overpaying your mortgage is now is more beneficial now (with a higher interest rate) than it was when you had the super low interest rate. It's time to overpay if you can. 

There was no question about overpayments.  The question was understanding why you pay more interest when the interest rate is higher, and whether that stops you paying off the whole capital within the term.

You don't need to perform amortization calculations or consider curve shapes to understand this.  You are complicating the matter by answering questions that were not asked.

Confused_Pigeon

Thanks for all the replies its much appreciated. My concern was that I was paying a very small amount of capital vs the interest payments for the last two years compared to the amount of capital I was paying off for the large part of the first 5 years of mortgage. But then again I dont understand the mortgage mathematics and I thought the capital repayments would increase as the years go by while the interest decreases obviously taking the bank interest rate increase into account. It just looks heart breaking that 61% of my mortgage repayment pays interest and not the capital which flipped around compared to the first 5 years. However you have all confirmed the calculations checkout over the 17 year projection and if I overpay to reduce the capital owed I can further shave few years off the mortgage length. 

Right or wrong in my mind it makes sense to overpay and reduce the length of mortgage rather then reduce the monthly payments and keep to the original mortgage length of 25 years.

Thanks again for your replies

BarelySentientAI

Confused_Pigeon said:

Right or wrong in my mind it makes sense to overpay and reduce the length of mortgage rather then reduce the monthly payments and keep to the original mortgage length of 25 years.

Nothing wrong with that.

If you could get a better return putting the money somewhere else, it might make more sense just from strict financials, but as tacpot12 said, your rate is now going up so that could be unlikely.

There are a lot of overpayment calculators online that will show you how much overpayments could reduce the term.

A note though, some lenders automatically reduce monthly payments rather than mortgage term when you make overpayments - so you might need to tell them to do it the other way or just change your overpayments to compensate.

DullGreyGuy

Stop looking at it in ratios and look at it in absolute terms. I assume you haven't extended your mortgage duration but maybe added the product fee. What was the actual £ amount you were paying off the mortgage previously and what is it now?

Altior

Right or wrong in my mind it makes sense to overpay and reduce the length of mortgage rather then reduce the monthly payments and keep to the original mortgage length of 25 years.

Sorry to introduce more complexity, but hardly anyone seems to consider the time value of money. They should. What you can buy with a £ now is a lot more than it will be in 20 or 25 years. 

So in simple terms, the benefit of applying overpayments and maintaining the term you see now (and every subsequent payment). While shortening the term means the benefit is realised in decades time. 

There are a lot of moving parts of course, and future inflation is a big part, nobody knows where that will be in the next few years let alone 10 or 15. Personally I favour reducing the monthly repayments to get the guaranteed benefit now, rather than deferring it for a long way into the future. Even if means the total payments overall will be higher as the additional payments are at the tail of the curve. 

housebuyer143

Altior said:

Right or wrong in my mind it makes sense to overpay and reduce the length of mortgage rather then reduce the monthly payments and keep to the original mortgage length of 25 years.

Sorry to introduce more complexity, but hardly anyone seems to consider the time value of money. They should. What you can buy with a £ now is a lot more than it will be in 20 or 25 years. 

So in simple terms, the benefit of applying overpayments and maintaining the term you see now (and every subsequent payment). While shortening the term means the benefit is realised in decades time. 

There are a lot of moving parts of course, and future inflation is a big part, nobody knows where that will be in the next few years let alone 10 or 15. Personally I favour reducing the monthly repayments to get the guaranteed benefit now, rather than deferring it for a long way into the future. Even if means the total payments overall will be higher as the additional payments are at the tail of the curve. 

This! It's going to be much easier to pay off £100k in 20 years times just because you will be earning more and inflation has reduced your original loan. I had a £130k mortgage 15 years ago and it was harder to make to the monthly payment then, than the same £130k mortgage is now, namely because in that time minimum wage/take home pay has almost doubled as have the salaries for many jobs. 

I choose to pay a little as possible and enjoy the money now so that longest term is my preference. Obviously there are lots of moving parts, but a mortgage is a very cheap loan and people are really obsessed with clearing it as soon a ls possible, when in reality unless you are close to retirement there is not a huge benefit in plowing all your cash into it. Just my opinion of course.

ian1246

On the flip side - beside the long term financial gains from overpaying (saved interest) there can be other benefits.

I.e. my mortgage is until I m 74 years old, yet I can retire with full pension at 60. Overpaying will shorten the term & make that viable.

I also have 2 mortgages - 1 at around £185,000 at 2.52% interest fixed for another 6 years, one of £37,000 at 6.69% for another 16months.

Mortgage payment is £844.00 a month - 33.76% of my take home income.

If I do nothing and just make the monthly repayments and if fixed deals are around 4.52% in 6 years time, I can expect a 2% rise on what will then probably be around £172,000 - so my monthly payments going up by around £280 a month.

That is likely to drive my % of income on housing costs up even higher.

However if i overpay the smaller mortgage & get it gone within 6 years, realistically I'll be saving interest in the long run, but also the monthly payments which would have gone on that will then be able to accommodate the interest rise on the main mortgage- allowing my housing costs as a % of income to stay the same/ reduce (inflation).

Lots of things to think about when planning overpayment....