A Few Mortgage Questions....

[paulrockliffe]

I'm putting together a budget spreadsheet to work out our financial position if we borrow x, y or z. I could do with knowing a couple of things:

1. How is interest charged on a mortgage? Is it done monthly or daily etc?

2. Would the capital repayment be linear across the term of the Mortgage? Eg, £120k over 10 years = £1k a month every month to repay the capital. (+ the interest which would fall as the capital falls)

3. We would want to prioritise flexibility in repayments, eg borrow over 15-20 years but repay in 5-10 years. Can anyone suggest a rough 'cost' associated with that level of flexibility? Eg, if we had £100k deposit and borrowed £100k at 3% over 20 years, would the same finance cost 4% for example if we wanted to be able to over-pay the capital massively? Just a rough idea is fine at the moment.

Thanks!

[scotal]

paulrockliffe said:

I'm putting together a budget spreadsheet to work out our financial position if we borrow x, y or z. I could do with knowing a couple of things:

1. How is interest charged on a mortgage? Is it done monthly or daily etc?

Depends on the lender. Many are daily, some are monthly. some are even Annual.

paulrockliffe said:

2. Would the capital repayment be linear across the term of the Mortgage? Eg, £120k over 10 years = £1k a month every month to repay the capital. (+ the interest which would fall as the capital falls)

No. You pay off relatively little in the early years and more towards the end of the loan

paulrockliffe said:

3. We would want to prioritise flexibility in repayments, eg borrow over 15-20 years but repay in 5-10 years. Can anyone suggest a rough 'cost' associated with that level of flexibility? Eg, if we had £100k deposit and borrowed £100k at 3% over 20 years, would the same finance cost 4% for example if we wanted to be able to over-pay the capital massively? Just a rough idea is fine at the moment.

Thanks!

If you stick to 10% overpayments per year it won't cost you anything.
If you utulise offset (which will cost you sltghtly in temrs of rate) then you can overpay pretty much as much as you like.
Schemes with absolutely no tie ins are available, but they are not usually a lendes most attractive rates varies between lenders.

[paulrockliffe]

Thanks, that's useful. I'll calculate the interest Monthly for now, it'll be close enough for what I need. If I need to change it at a later date it's not too difficult.

Is there a standard formula for calculating the capital repayments each month. Given that we would be aiming to over-pay significantly I can do my sums on the basis of a linear repayment model as that would be a conservative position, but it would be good to have the numbers as close to what the lender would want as possible.

We'd be looking to overpay by much more than 10%, but would like to borrow without making a firm commitment to that overpayment to allow for contingencies such as redundancy, children etc etc. Offset sounds like it could be a good option are there any negatives other than interest rate? We'd be happy to pay a bit extra on the rate as overpayment would generate a saving in the interst paid anyway. Any idea what a typical penalty could be for a zero tie-in option, 1%, 2%m 5% etc?

Thanks

[sumo69]

Use a comparison website such as moneysupermarket.com which will give you all the best buys - you can then see what the interest penalty is between various products.

I believe First Direct have a good offset product and Barclays do one as well.

David

[JungleJim]

paulrockliffe said:

Thanks, that's useful. I'll calculate the interest Monthly for now, it'll be close enough for what I need. If I need to change it at a later date it's not too difficult.

Is there a standard formula for calculating the capital repayments each month. Given that we would be aiming to over-pay significantly I can do my sums on the basis of a linear repayment model as that would be a conservative position, but it would be good to have the numbers as close to what the lender would want as possible.

We'd be looking to overpay by much more than 10%, but would like to borrow without making a firm commitment to that overpayment to allow for contingencies such as redundancy, children etc etc. Offset sounds like it could be a good option are there any negatives other than interest rate? We'd be happy to pay a bit extra on the rate as overpayment would generate a saving in the interst paid anyway. Any idea what a typical penalty could be for a zero tie-in option, 1%, 2%m 5% etc?

Thanks

To work out the monthly payment you do this:

Payment = (i*P)/(1-(1+i)^N)

i = interest rate for payment period (e.g mortgage rate of 5% become 5/12/100 = 0.00416...)
P = loan amount outstanding
N = number of payments outstanding
^ = to power of

The interest paid in the month is i*P and the capital paif in the month is (payment-(i*P)).

It probably won't get it to the penny exact compared to banks calculators, but it'll be close enough for your budgeting and certainly within a few pounds if not pence.

[paulrockliffe]

JungleJim said:

To work out the monthly payment you do this:

Payment = (i*P)/(1-(1+i)^N)

i = interest rate for payment period (e.g mortgage rate of 5% become 5/12/100 = 0.00416...)
P = loan amount outstanding
N = number of payments outstanding
^ = to power of

The interest paid in the month is i*P and the capital paif in the month is (payment-(i*P)).

It probably won't get it to the penny exact compared to banks calculators, but it'll be close enough for your budgeting and certainly within a few pounds if not pence.

Thanks, I don't have time right now to work out exactly what's going on there, but does that basically keep the mortgage payment the same over the course of the mortgage term? I can see how that's a good thing, but it does push the total interest paid up quite a bit compared with a linear capital repayment model!

I've gone through all the numbers this afternoon and it looks like we'd be better off with an offset mortgage and that that calculation wouldn't be relevant as we'd effectively be defining our own capital repayment model; we'd be comfortable paying the mortgage off in 10 years which would cost £26k in interest in total, rather than £78k if we borrowed over 30 years. Best case scenario has us down at 6 years to repay, but I doubt I can shrink the girl's shoe budget quite that much!

Cheers!

[fandango_c]

JungleJim said:

To work out the monthly payment you do this:

Payment = (i*P)/(1-(1+i)^N)
.

Missing a minus sign, it should be: (i*P)/(1-(1+i)^-N)

[fandango_c]

paulrockliffe said:

Thanks, I don't have time right now to work out exactly what's going on there, but does that basically keep the mortgage payment the same over the course of the mortgage term? I can see how that's a good thing, but it does push the total interest paid up quite a bit compared with a linear capital repayment model!

I've gone through all the numbers this afternoon and it looks like we'd be better off with an offset mortgage and that that calculation wouldn't be relevant as we'd effectively be defining our own capital repayment model; we'd be comfortable paying the mortgage off in 10 years which would cost £26k in interest in total, rather than £78k if we borrowed over 30 years. Best case scenario has us down at 6 years to repay, but I doubt I can shrink the girl's shoe budget quite that much!

Cheers!

Mortgage payments are normally the same over the course of a mortgage (assuming the interest rate doesn't change). Paying off the same amount of capital would make result in the mortgage being a lot more expensive initially and a lot cheaper towards the end of the term - it would reduce the amount that could be borrowed. But as you say, if you make large repayments initially, it will reduce the term and interest paid.