Mortgage Payment Calculation

Graeme7777

Hi,

Is there a standard way that mainstream mortgage lenders calculate monthly repayments?

For example, a £250,000 mortgage repayable over 25 years at 6.00%pa, means you're paying 0.50% interest per month, which translates into a monthly repayment amount of £1,610.75. Is this how most mainstream lenders calculate the repayment amount?

Thanks

poppy10_2

You haven't taken into account compounding. It's too simple to say 0.5% per month. It's a bit higher than your figure.

http://www.bbc.co.uk/homes/property/mortgagecalculator.shtml

Graeme7777

Thanks Poppy10.

I have (I think) taken the compounding into account in my calculation. The 0.50% per month I mentioned (nominal rate, I think it's called) compounds to 6.17% per year which is the basis on which my payment amount was calculated.

17Dave

Hi Graeme
The way most lenders calculate their repayments is based upon daily interest rather than monthly. Some still use the annual method which is far more expensive.
So each payment reduces the balance a bit and so the interest over time reduces and the capital repayment increases.

In your example month one year one is:

Interest £1229.66 Capital 381.09

Month one year two:

Interest £1206.15 Capital 404.60

All the way to the final payment:
Interest £8.01 Capital £1602.74

hope this helps.

Graeme7777

Thanks very much 17Dave!

Does this mean that the I should use the Excel PMT function as follows?

=pmt(6%/365,25*365,250000)

Or what should the function look like to calculate the payment as most lenders do?

Thanks!

Tiddler_2

Graeme7777 wrote: »

Thanks very much 17Dave!

Does this mean that the I should use the Excel PMT function as follows?

=pmt(6%/365,25*365,250000)

Or what should the function look like to calculate the payment as most lenders do?

Thanks!

Graeme, that would be the calculation if you were expected to make a payment every day, but they don't.

As they expect a payment every month the formula to use is

=PMT(6%/12,25*12,-250000) the minus sign is used to get a positive figure at the end of the calculation.