i thought it was simple maths;


a repayment mortgage of £100,000

£100,000 over 25 years = £4000 per year plus interest

1% = 1000 per year

so total repayable would be:

1% - 5000/year £416/month
2% - 6000/year £500/month
3% - 7000/year £583/month
4% - 8000/year £666/month
5% - 9000/year £750/month
6% - 10,000/year £833/month
7% - 11,000/year £916/month

but when i go on mortgage calculators they show a lower repayment amount.

what am i not getting right here?

also, if a repayment mortgage means you are paying off part of the house as well as interest, lets say after 5 years i wont owe the bank the full £100,000 so if i get another mortgage for the outstanding balance, i should pay less interest????

im very confused

Hi Ben,

The way you are calculating the repayments is not quite accurate.

The repayments are calculated in a much more complicated way than that, in fact the mathematical formula would take up a whole page on its own.

But to try to explain, think of it in a different way.

Rather than looking at the total amount borrowed and dividing that by the term of the loan - ie £100,000 / 25yrs / 12 months - it is looked at a different way.

If you used the above method, then the first monthly payment would be £333.33 plus interest on the £100,000 for one month. That would mean on the second month, you would pay the £333.33 monthly repayment plus interest on £100,000 minus the £333.33 payment, giving you a slightly lower payment, and this would continue, giving you slightly lower payments each month as the amount that interest is charged on would keep reducing.

Rather than the doing it this way, the mortgage is calculated so you pay the same total payment each month for the term of the loan (assuming a fixed interest rate).

This means that for each subsequent payment, you are paying off slightly more of the capital and slightly less in interest.

Initially, quite often a larger portion of the payment you make is interest than capital repayment, which is why after your first few years, you may notice that the mortgage balance has reduced by a small amount. As you get closer to the end of the term the portion that is capital repayment becomes gradually larger and will eventually be greater than the portion that is interest. So towards the end of your mortgage term, you will see the outstanding balance reducing much quicker.

You are right in your last comment, after 5 yrs the balance will have reduced and if you were to remortgage for a new loan, the total you need to borrow would be less, so the interest you pay would be less, but at the same time the term of the loan would by less, so assuming the same interest rate, your payments would be exactly the same.

I hope this helps you understand and if you are still unsure of anything either post another question on here or alternatively contact a mortgage broker who should be able to explain it to you.

Dan

I'm struggling to keep up with my mortgage payments, a friend told me to contact a mortgage advisor to see what options I may have available.

He gave me the name of a mortgage advisor company in Hampshire Mortgage Next http://www.mortgage-next.com

Should I call them?