How to calculate interest proportion of mortage payments

Banks, as a matter of course, send you a statement of how much interest you've earned on savings during each tax year, and of how much tax they've withheld. It's a great pity they don't also tell you how much interest you've paid on loans, particularly if they *know* that the property is being let and that you therefore need to have this information. Perhaps if you were to ask them, they might oblige.

But meanwhile, the key item of information missing, to enable you to work it out yourself, is the balance outstanding at the beginning of the interest month which ends with the first payment taken during the tax year. If you also have the balance a year later, then it's easy: The difference bewteen the balances is the amount of capital paid off during the year, and hence the interest paid must be 12*£403.34 minus that amount.

If you only have the first balance, then you could proceed as follows, assuming (which may not be the case with your particular loan) that payments are applied to the loan balance each month, and that the interest charged is actually 1/12 of 6.79% per month:

Suppose payments are taken on the 28th of each month and that the balance outstanding on 28th March 2004, immediately after the March payment, was £X. Then interest charged for the period 28th March to

28th April must be £X*0.0679/12, and the new balance will be £X plus that interest, minus £403.34. Use this new balance to calculate the interest charged for the following month, and repeat ten more times. Strictly speaking you should also apply an accrual correction, since you will have worked out interest from 29th March to 28th March instead of 6th April to 5th April, but let's not worry about that.

It's still a bit tedious, though, and in any case you might not know what the relevant year-start balance was. The next best thing is to estimate it, but for this you need to know the length of term remaining, since it will on the basis of that, that the monthly payments will have been calculated in the first place. You can simply reverse the formula to solve for the amount outstanding, given the monthly payment, instead of doing the more usual thing of working out the payment from the amount oustanding.

The normal formula is: P = Bn * (f-1) / (1 - f^-n) P: monthly payment Bn: balance outstanding with n months to go n: months to go f: monthly interest factor (in your case 0.0679/12 + 1, or 1.0056583)

Solve for Bn: Bn = P * (1-f^-n) / (f-1)

Hence, if yours was a 300-month loan, and the rate has always been the same, then you must have borrowed £403.34*(1-1.0056583^-300)/0.0056583

That's about £58165.

This works not just where n is the original size of loan term, but for any other number of months outstanding, say m, and then we can plug in P from above and get:

Bm = Bn * (1-f^-m)/(1-f^-n)

which gives an easy way of working out the balance outstanding at any time, provided you know the balance at any other time, both times measured backwards from when the term is due to end, provided the interest rate does not change inbetween (if it does, that's OK, you just need to work out the balances at the rate change points, and use these as stepping stones).

Well, some lenders don't actually apply the payment to the loan until the end of the year, and if this is the case with yours, then the October->October interest is really apportioned linearly throughout the year. In that case, work out how many days there are from 6th April to the relevant statement date (say d) and then (365-d)/365 of the interest reported in October 2005 will relate to the period October 2004 to 5th April 2005, and d/366 of the interest reported in October 2004 will relate to the period 6th April 2004 to October 2004.

So it does (or can) help, except for the fact that you probably don't want to wait until October to complete your tax return.

"Ronald Raygun" wrote

Ermm - if the OP doesn't actually know (for his particular loan), then will the IR (now HMR&C) accept these kind of assumptions in his tax return?

"Ronald Raygun" wrote

Hmmmm. Won't he then still have to provide accurate figures to the IR (HMR&C) later on?

He won't state his assumptions in the tax return. He'll only put figures, without saying how they were derived. In the unlikely event of an investigation, then so long as his derivation was reasonable, I doubt if it would be challenged.

Not as such, but I do think he should incorporate a correction into the following year's accounts if the statement shows his estimate to have been substantially inaccurate. But the correction can stay buried in the detail of his accounts. What is reported on the tax return need not show that level of detail.

He estimates his interest for 04/05 now, and enters that amount into his tax return. Later, his statement shows him that his estimate was £20 too high. So next year, he estimates his interest for 05/06, and simply enters that figure minus £20 into that year's return.

Your lender should provide you with a Certificate of Interest Paid for the period ended 5 April 2005, if you request it.

Presumably the bank knows you are letting out the property, so if you ask them they will give you a break-down of interest paid during the tax year.

Thanks for all the replies! Having read RR's reply first my head is spinning a bit, so I think I'll try Doug's advice before getting out my calculator...

Cheers Dave

If you have Excel, you can install the Analysis Toolpack and use the following formula to work it out:

=IPMT(NOMINAL(InterestRate/12, 12), CurrentMonthNo, TotalMonthsinLoan, PV(NOMINAL(InterestRate/12,12), TotalMonthsinLoan, -MontlyPayment))

If you have OpenOffice.org, a free download. You can use the same formula, but substitute ","s for ";"s.

In message , Ronald Raygun writes

They do. The info they give you about credit interest relates to interest paid during the period, not accrued during the period.. IN the same way, the annual mortgage statement will show interest that has been paid during the period, but not that which accrues. For buy to let loans, this is usually sufficient for tax purposes.

They will. It is (or certainly used to be) normal practice for banks to record the accrued (but not paid) interest on business accounts as at the end of the company accounting year and provide that information on the annual questionnaire sent in by the company auditors.

In message , Doug Ramage writes

I think the OP is looking for the accrued position as at the end of the financial year.

As an aside A Cert of Interest Paid can only be issued by a bank if the interest has been paid and not merely debited to the loan account and merely increases the debt. There has to be subsequent credits to the account at least equal to the interest charged before the cert can be issued.

I'd agree that trying to report accrued interest in your BTL tax return is probably a little over the top, but where it becomes not good enough to use the actually-paid-interest from the statement is where the period covered by the statement differs wildly from the period covered by the tax return, unless the statement goes into enough detail, e.g. by showing how much interest was paid in each month. If it only gives an annual total, I'd say it's usually not good enough.

There's also the added problem that the timing of the annual statement can be such that it's simply not available at the time the taxpayer wants to complete his return. As in the case of the OP, waiting until October is just not on.

I don't think he is, John. I think it is the current amount of interest paid for the Income Tax Year, due to the lender's statement covering the year to October rather 5 April - but perhaps the OP will clarify.

Not sure that this OP knows himself, TBH!!

What I get from the lender, helpfully sent out in October, is an Annual Mortage Statement which states my Opening Balance, then under "Debits" it lists X as 'interest applied to the mortgage account' and under "Credits" it lists -Y as 'mortgage payments'. Obviously Y/12 represents my monthly direct debit payment, and X/12 is substantially less than this.

I have another BTL repayment mortgage from the same lender, where the statement comes out conveniently in April, and in the past I've just used the interest figure on the statement in my accounts. So do I gather from the discussion that this is not in fact right?

I phoned the lender the other day in fact and asked them if they'd send me a certficate of interest paid for 2004-2005 "for my tax return", which they were happy to do (in about a fortnight cos they're busy - sheesh) - so presumably this will contain the correct numbers at least??

Thanks Dave

No, it is correct.

The other option could be to time apportion the interest from 2 relevant statements. This would mean, for 2004-05, 7/12ths x October 2004 + 5/12ths x October 2005.

In message , Dave P writes

It will only show the interest which has been debited to the account, and should only include that interest for which the value of subsequent credits exceeds this. It will not show the interest that has accrued for the tax year.