Random mortgage questions

[ash_scotland88]

For a start I am in no position to buy, but just wondering how mortgages work. I honestly don't have much financial knowledge and it's just a really random thought I had today.

1)Interest only. You only pay the interest each year.
For example you get a mortgage for £100,000 at 3%. Each year you pay the bank £3000 never reducing the over all amount owed.
Correct?

2)Interest and repayment, how does this work?
Using the example again, and say it's a 25year mortgage first year would be:
The £3000, plus 1/25th of £100,000 which is £4000. So repayment would be £7000? So effectively the mortgage is now reduced to £96,000?
Would the next year be 3% of £96,000 and an other £4000?
then they year after 3% of £92,000 and so on?
Basically each year reducing the amount that is paid.

I'm guessing it's not as simple as that and they use some calculation to work out what 3% is added on over the 25years* then devide that number by 25.

So yeah, someone care to try an explain?

*I admit I've forgotten my maths how to work out a percentage that increase everyear apart from going:
Y x %= X(1)
X x % =X(2)
X(2) x % = X(3) and so on.

 

[Haircut]

No, it's not quite like that.

For a £100K loan at 3% over 25 years you would pay £474.21 each month.
Initially the payments are made of of mostly interest payments rather than actually paying down the principal.
There's a bit of maths involved for how to calculate all the figures, which I can go through if you're interested.

 

[ash_scotland88]

is that for the interest and repayment?
So do they work out what the cumulative 3% over the 25years value is then?

You could try and explain it to me.


ps I do know there's various online mortgage calculators out there, but thought when/if the time comes having this knowledge would put me in a better understanding place.

 

[the wopster]

Sorry to jump this thread,Could I get a morgage with a part time job if I was to put £50000 down and borrow £20000

 

[Haircut]

is that for the interest and repayment?
So do they work out what the cumulative 3% over the 25years value is then?

You could try and explain it to me.


ps I do know there's various online mortgage calculators out there, but thought when/if the time comes having this knowledge would put me in a better understanding place.

That figure is for a repayment mortgage.

To do the calculation let's assume you have a 25 year mortgage that is paid monthly, that is 300 individual payments.
Let's also assume an annual interest rate of 3%, which is 0.25% (or 0.0025) per month (3 / 12)

So, to work out the initial payment we use a formula to work things out.

Payment = 100000 * (0.0025 + (0.0025 / (((1 + 0.0025) ^ 300) - 1)))
Explained here, if you feel like a bit of reading! http://en.wikipedia.org/wiki/Amortization_calculator

This gives us the £474.21 figure.
From this you can work out that the interest portion of this is 100000 * .0025, which is £250.
So the initial payment pays £250 interest and £224.21 of the actual loan, leaving £99,775.79.

You can then do the same assuming a 299 period mortgage paying £99,775.79 to get the next figure. Rinse and repeat for the remaining 300 payments and you get a schedule of mortgage payments detailing how much principal and how much interest you're paying each time.

 

[Derek W]

Sorry to jump this thread,Could I get a morgage with a part time job if I was to put £50000 down and borrow £20000

Think quite a few places only fork out mortgages of 30k minimum. There is a low threshold as well as a high threshold on the amount you can borrow.

 

[ash_scotland88]

You can then do the same assuming a 299 period mortgage paying £99,775.79 to get the next figure. Rinse and repeat for the remaining 300 payments and you get a schedule of mortgage payments detailing how much principal and how much interest you're paying each time.

I admit I fail to understand =[

But quoted this bit as it sounds like each payment would still be less than the previous one. Is that the case?


Also an other random mortgage question, where those mortgages based on how much you've previously paid for rent ever released in the market?
For example if you can prove you've succesfully been able to pay £700 for rent each month for the past 5years you're mortgage is based off this figure, and not how much you actually earn.

 

[Haircut]

But quoted this bit as it sounds like each payment would still be less than the previous one. Is that the case?

No, the total amount for each payment stays the same, but the amount of the payment that is interest reduces.
The table below shows the first 24 months of the £100K @ 3% mortgage.
You can see that the amount that is interest reduces and the amount that is principal increases as time goes on.

Payment No	Interest	Principal	Total Payment
1		£250.00 	 £224.21 	 £474.21 
2		£249.44 	 £224.77 	 £474.21 
3		£248.88 	 £225.33 	 £474.21 
4	 	£248.31 	 £225.90 	 £474.21 
5	 	£247.75 	 £226.46 	 £474.21 
6	 	£247.18 	 £227.03 	 £474.21 
7	 	£246.62 	 £227.60 	 £474.21 
8	 	£246.05 	 £228.16 	 £474.21 
9	 	£245.48 	 £228.73 	 £474.21 
10	 	£244.90 	 £229.31 	 £474.21 
11	 	£244.33 	 £229.88 	 £474.21 
12	 	£243.76 	 £230.45 	 £474.21 
13	 	£243.18 	 £231.03 	 £474.21 
14	 	£242.60 	 £231.61 	 £474.21 
15	 	£242.02 	 £232.19 	 £474.21 
16	 	£241.44 	 £232.77 	 £474.21 
17	 	£240.86 	 £233.35 	 £474.21 
18	 	£240.28 	 £233.93 	 £474.21 
19	 	£239.69 	 £234.52 	 £474.21 
20	 	£239.11 	 £235.10 	 £474.21 
21	 	£238.52 	 £235.69 	 £474.21 
22	 	£237.93 	 £236.28 	 £474.21 
23	 	£237.34 	 £236.87 	 £474.21 
24	 	£236.75 	 £237.46 	 £474.21

Below is an image demonstrating things as well.
Hopefully it also shows why it's a good idea to overpay the mortgage if you can. Basically the area of the red part is the total principal, i.e. £100K.
Any overpayments go straight into paying off the principal, in effect adding to the red area. This means that the interest then goes down even more and you pay the mortgage off a lot quicker.

 

[radderfire]

An interest only mortgage is a much riskier choice. That's because there is no formal repayment vehicle in place with the mortgage, it is left up to the borrower to make arrangements for the repayment of the principal (the actual amount borrowed), and the monthly payments are only going on interest. That means if you don't get a proper repayment vehicle in place, you may have to sell the house at the end of the mortgage term.

Rgds