How does the interest vs repayments work on a mortgage?

skippy081

Hi

Let me just rephrase the question a little bit. I've just been able to buy a house but took the Interest Only mortgage for 2 years fixed (borrowing for 25 years) . After the two years I will definitely go on a Repayments Mortgage when I remortgage. But my question is, does anyone know how this works? I mean, are my first 2 years wasted by ONLY repaying the interest on the amount I borrowed, or does it somehow accumulate and when I remortgage it recognises that I have for 2 years repaid quite a lot of the interest and hence starts to after I move to a Repayments Mortgage pay off less of the interest and actually more of the amount I borrowed? Sorry if I didn't explain it too clearly but be great if anyone is good with numbers and knows about this stuff.

Thanks a lot in advance for any sort of advise.

Just wanted to say thanks to martin for a fantastic site, i use A LOT of his money saving advises and hence been able to buy a house in london! keep up the great work martin (if you read this!):T

Andy_Hamilton

If your lucky your house value will have gone up in the next 2 years, this will mean you would not need 100% mortgage getting better rates (that's not taking into account the doom and gloomists).

Since you have not paid any capital off your house treat your interest for the 2 years as rent, then it won't feel like it's completely wasted.

Shimrod

If you're on interest only, you are effectively only keeping you head above water. The amount you owe now will still be the same in two years time. When you remortgage in two years time, if you go onto repayments, that will be when you start to see the amount you owe reduce. It will go down slowly at first, as most of what your payment covers is interest.

If your mortgage is fixed for two years, do you have to pay a redemption fee if you remortgage for x years after that? Also, did you pay an arrangement fee? Was it added onto the mortgage?

beingjdc

I'm not exactly sure what question you're asking, but if it helps then in payment terms moving to a repayment mortgage is as if you got a new mortgage for the same amount. Having had one before makes no difference.

You haven't "repaid quite a lot of the interest", you've paid the interest. Over time on a repayment mortgage, the interest reduces so more goes to paying off what you've actually borrowed. On an interest-only mortgage, that obviously doesn't happen - if you kept paying an interest only mortgage, it would last forever - the interest is monthly, not a fixed total amound.

UK007BullDog

Its quite simple:

Interest only: you pay just interest, you do not pay anything off (its like rent)

Repayment: you pay interest and part of the loan back to the bank.

Repayment: At first you pay more interest and over the years the actual loan repayment increases to pay off more and more of the loan.

Example:
year 1: mortgage payment £500 : £450 interest & £50 loan repayment
year 5: mortgage payment £500 : £400 interest & £100 loan repayment
Year 10: mortgage payment £500 : £250 interest & £250 loan repayments
year 25: mortgage payment £500 : £50 interest & £450 loan repayments

of course over the years the rates change and so will your monthly payments, but this is how it basically works.

Hope this helps.

maninthestreet

Try this mortgage calculator:

http://www.jeacle.ie/mortgage/uk/

skippy081

Thanks to everyone for the replies, totally clear now!

Luckily I was able to put down 25% deposit on my house and got it at 10% less than the asking price.

SHIMROD:

If your mortgage is fixed for two years, do you have to pay a redemption fee if you remortgage for x years after that? - NO

Also, did you pay an arrangement fee? YES

Was it added onto the mortgage? NO - PAID IT MYSELF

Shimrod

Just asking the questions - it's normally possible to add these fees onto the mortgage, so that at the end of the two years you would have ended up owing more than you had 'borrowed', as people sometimes forget about the fees, and only remember how big the mortgage was.