Question about early repayments for mortgage

Assuming you've got a standard mortgage with no tie in (usually because of reduced or fixed rate) then you can (approximate) this in a spreadsheet very easily.

In one column put the Total of the mortgage. In the next column multiply the total by the interest rate (interest) In the third column put 12x your monthly repayments (annual repayment) Then in the next row (in column 1) the new total for year 2 is the original amount plus the interest minus the annual repayment.

Copy the formulas for columns 2 and 3. Then repeat for as many rows as you need.

There are formulas for working out what the annual repayment should be but it's probably just as easy to make a guess, see if the loan has been paid off in 25 years and then adjust accordingly.

In practice, many mortgages tend to calculate interest monthly or daily which slightly reduces the amount you have to pay.

Tim.

Thank you! And the repayment amount for the year will be in the column, correct?

Oops, I meant "in the column 1" ;-)

I find it hard to imagine these circumstances being consistent with you *taking* a mortgage. You'd be *giving* one.

The balance which you owe. You'll find your lender sends you an annual statement telling you how much that is.

No, it is this amount minus however much of it you've already repaid as part of the payments you've made. Your monthly payments are partly interest and partly repayment of loan. Each month you pay enough interest to borrow the sum outstanding (which is initially £180k) for exactly one month, plus a bit extra to reduce the balance by a bit.

In month 2 you will therefore be charged a bit less interest than in month 1, because you are borrowing that little bit less. And so it goes on, with the balance reducing by a bit more each month, until after the 300th payment it reaches zero. The monthly payment has been cunningly calculated to bring this feat about, and is equal to the amount borrowed times the monthly interest rate, divided by (1-(1+r)^-300) where r is that interest rate.

No, of course not.

No, though it's easy to see why this *could* be the case, i.e. if your loan agreement is viewed as a fixed 25-year commitment in which you must repay a total of £360k come what may. Fortunately it doesn't normally work like that.

Well, if the total sum is £360k, the monthly payment must be £1200. Assuming monthly compounding, the interest rate you're using must therefore be 0.53025% per month, or a nominal 6.363% per year.

If you're repaying after 10 years (i.e. with 15 years or 180 months of the original 25 year term still to go), your loan balance at that point would be expected to be (1-1.0053025^-180)*£1200/0.0053025 which is just under £139k. In other words, during the first 10 years you would have reduced the loan balance by £41k.

Sorry, if that was ironic, then I did not understand it ;-) (little linguistic difficulties)

That was just an example. I'm single (and I don't see this changing in the next 10-15 years), so my only hope for normal home is to get large mortgage (salary x 4) for longer period (25 years).

Don't worry. Most people don't understand it. It wasn't irony.

Most people make the mistake of thinking a mortgage is a loan. Actually a mortgage is a document whereby the owner of the property against which the loan is secured gives the lender certain rights, so it is the borrower who *gives* the lender the mortgage, whilst is is the lender who gives the borrower the loan.

Yes.

You can then play with paying a tiny amount extra and see how it shortens your mortgage term. (for very small increases you'll have to do a monthly calculation instead of annual)

And if you work out what your repayments would be if interest rates went up (to whatever you think is possible) and then pay that amount instead, if interest rates do go up you won't even notice[1] (other than your mortgage will take a bit longer to pay off) and if they don't go as high as you feared then you will pay your mortgage off quite a lot earlier - for example if you repay your mortgage assuming 9% interest rates but it stays at 6.5% for its lifetime then you will pay your mortgage off in 16 years instead of 25 years.

Or if you are going to stretch yourself but are expecting your salary to increase then you could, for example, go for a 5 year fixed rate for the security while you are getting set up (a first house is very expensive even if you do everything on the cheap) and then increase your payments once the fixed term has expired.

Tim.

But true irony is that none of that actually matters a jot.

Doesn't it? Tell that to those whose homes are being repossessed when they can't keep up the payments.

LOL. Are you suggesting if the knew the difference in the terminology they would have been able to keep up the payments? A bit much even for you!

Because semantics pays the mortgage?

Don't be ridiculous.

No, I mean that of they hadn't given a mortgage, the lender couldn't kick them out.

Even for me? What's that supposed to mean? You want to make it pistols at dawn?

Thank you for the advice! Definitely a lot of possibilities...

Well, as long as this weird relationship works - I don't care ;-)

You took the words right out of my mouth....

Nobody cares except for those who think they can show other's up with a demonstration of what they believe is their superior knowledge. :-)

In message , Ronald Raygun writes

The above text is copyright John Boyle 1994.

Now be fair to Ronald. This is uk.finance after all and it seems reasonable to try and use the correct terminology if possible. If it were uk.milkmen then it might not matter so much.