mortgage required 100000 Repayment period 25 years Interest 6.00
it gives the montly repayment as :- 651.88 interest only payment :- 500.00
But one thing i don't understand , 651.88 - 500 = 151.88 x 12 x 25 45564.00
Surely thats not correct? i would of assumed that the figure left from subtracting the interest only payment , would leave a figure that would equate to 100000.00 over a 25 year period , or is the bbc mortgage calculator totally wrong ???
If you take on an interest only mortgage, the amount of your payments over the term is 150K. If you take out a repayment and interest mortgage your repayments over the term are 195,564. So, for a mere 45,564.00 over the full term (or 151.88 per month x 12 x 25 years), you will end up with no mortgage, but owning your own home. If you end the 25 year interest only mortgage having made no repayments to the capital amount, then you will own nothing, but still owe 100,000, regardless of the fact that you've just paid the bank 150,000 in payments.
The thing to remember is that all the time you are making capital and interest payments (on a repayment mortgage), the amount of capital you owe decreases by 1/300ths every month, so the ratio between capital and interest on your mortgage payment goes from, say 99:1 to 1:99 over the 25 years. If you've got a interest only mortgage, then you will pay interest on the full amount, in this case 100K, for the full term of the loan.
I haven't checked but the numbers look reasonable.
Don't forget, after the first month of a repayment you are only paying interest on 999850 (100000-151.88). After the second month interest on about 999700 etc.
This is why paying a little more early on makes a huge difference. Paying just 100 GBP more for the first month will save you 6GBP/year for
Ahhhhh thank you for pointing that out about owing the interest over the full 25 years , as of course the amount owing goes down each month if paying a full payment etc .
This is actually incorrect, it should be £644.30 for 300 months at
0.5% per month. The £651.89 figure is technically right for 25 years at 6% per year, but because you're still making monthly instead of yearly payments, the deal is "dodgy": you repay *no* capital in the first 11 payments, and the £151.89 amounts are shifted sideways into a non-interest-bearing account, and left to accumulate over the year. At the end of the 12th month, 12x£151.89 is paid off the capital.
But in what follows I'll pretend £651.88 is right.
OK
OK
Actually you have owned it from day 1.
Wrong. You will own the house. If you don't repay the debt, nor come to an amicable arrangement with the lender for doing so, they will probably decide to "repossess" the house. That doesn't mean they pretend to own it themselves. It simply means they will force you to sell it (actually they will sell it on your behalf). If the proceeds of the sale exceed what you owe them, *you* will get the difference (because you own it). If the debt exceeds the proceeds of the sale, you will *still* owe them the difference. Just handing over the keys and vanishing without trace doesn't wipe the slate clean.
Indeed. You'd still owe what you had originally borrowed to help you buy the house. If we suppose for simplicity's sake that it was a 100% mortgage, and that the house actually cost £100k, you can't be seriously suggesting that you *both* "not own the house" *and* still owe £100k. That would be you "down" £100k, whereas in fact you're value neutral (unless the house has changed in value), just as you were at the outset. You started with nothing, and as soon as you bought the house, you owned it (worth £100k) while also owing £100k, which gets you to zero. At the end of a 25 year (indeed any length) term, this position would not have changed, but of course with a repayment arrangement, you would be "up" £100k (or whatever the house is then worth) because the debt has been whittled away to zero.
The "magic" of the arrangement, of course, is that it only costs you about £46k to reduce the £100k debt to zero.
It decreases, but not by 1/300th each month (except on average). In fact in the 1st month it decreases by £151.88, which isn't a 300th but a 658th (roughly).
Now you're just picking numbers out of thin air. In fact it's obvious what the starting an ending ratios are. In the first payment, there's £500 interest and £151.88 capital, so the ratio is about 1:3.29. In the last payment, the ratio must be 200:1 because the payment is 0.5% interest on the amount owed at the beginning of the last month, plus that amount.
Yes, and you could use this fact to end up with a totally *mortgage-free* home (albeit one a little smaller than the one you initially bought) :-
Let's suppose the house cost 100K and the
100K mortgage was therefore 100% LTV.
Over the 25 years, if interest rates remain at around
6%pa (on average), then you can expect the value of the house to go up to around 400K (that would be 5.7%pa, and we know that history shows that long-term house price inflation and average interest rates are broadly similar).
So, at the end of the 25 years, having paid just 150K to the bank over the 25 years (and no deposit), you sell the house for 400K, which pays off the remaining
100K loan and pays for a new house worth 300K.
That means that you get to own a 300K house, mortgage-free, from only making 150K payments!!
Sleight of hand - the '£150k' you paid is actually worth about £400k in today's money (assuming inflation is not far behind your house price inflation, and allowing as how some was paid early and some late). So you paid £400k, got a £300k house, and someplace to live in the meantime.
"£1" is a moveable feast. £400 in 1945 would have bought a nice house. £400 now won't pay for a survey on one. Paying £1000/year over the last
25 years and getting given 30k today is NOT making a profit - not if you understand that £1 in the hand is worth £X in the future.
I know that full well! I was replying to Oral-B's comments that you'd still owe
100K (that's nowhere near comparable to the house value at the time) and that you'd have paid 150K over the term (each of this actually has a different value, so the "150K" isn't really comparable to anything).
"GSV Three Minds in a Can" also wrote
Where did you get 400K from?
I assume by "today", you meant "at the end of the 25 years" (otherwise it's more like 75K in *today's* money).
If "inflation" is at exactly the same rate as interest/HPI, then the 150K over the term will be worth equivalent to 300K at the end of the term. However, if inflation is a little below the interest/HPI rate, then the 150K over the term is equivalent to **less than** 300K at the end of the term (not more, as your 400K is)...
[Test: Imagine "inflation" were 0%. Then each over the term is worth exactly one at the end of the term, so 150K spread over the term is worth exactly 150K at the end of the term.]
From assuming the interest payments were front end loaded, but since this was an interest only mortgage I'll cheerfully accept £300k. However the principal is the same - you get nowt for nothing, unless you assume house prices go up more than interest rates compound to (which has probably been true recently, but not over 25 years).
What about the use of the house over those 25 years? ;-) [You get that "for free": No rent payable, and payments worth 300K at end still give you 300K at the end, so you haven't paid anything to use the house for all those 25 years!]
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