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Who knows about mortgages?

(9 Posts)
Poocatcherchampion Wed 14-Sep-16 16:05:54

I don't really understand about the way interest is added onto mortgages? Is it compound interest -- if yes I will google this to try to drag my brain back to my schooldays--

I am trying to work out the best way to remortgage (hypothetically else I would just ask the broker).

Amount is £150000. Happy to pay £1000 a month.

I am trying to work out whether I would pay the same if I took out

- £150000 over 15years - approx £1000 a month - total £174000
- £150000 over 20years - approx £800 a month - total £199000 AND then overpaid the £200 a month difference each month.

The latter option is more attractive in terms of giving us more flexibility but I want to pay the least overall.

Can anyone explain this? Preferably in words of one syllable..

IsItMeOr Wed 14-Sep-16 16:13:26

Just use a mortgage calculator. Should quickly tell you your answer.

(I don't know how to calculate mortgage interest - DSis did show me the formula once, but I have long forgotten it).

IsItMeOr Wed 14-Sep-16 16:14:05

Oh, but repaying over the 15 years will always be the cheaper option, as you will pay 5 years' less of interest.

IsItMeOr Wed 14-Sep-16 16:16:23

Sorry, I really should have read your OP properly.

So long as your mortgage allows you to over-pay and pay off early penalty-free, and you always overpay £200 per month (and all other mortgage terms are the same), you should end up paying exactly the same amount either way.

atticusclaw2 Wed 14-Sep-16 16:17:22

You will pay less interest over shorter period because the loan is outstanding for a shorter period. But your monthly repayments will be higher.

Ifailed Wed 14-Sep-16 16:18:52

the longer the term of the loan, the more you'll pay overall. You can usually overpay by up to 10% in any year without penalties if you are feeling flush.

Poocatcherchampion Wed 14-Sep-16 16:25:59

Thanks isitme for getting my point in the end! Shorter term = pay less is the easy answer. It is a bit more nuanced than that..

Do others agree?

DadDadDad Wed 14-Sep-16 16:36:08

If the interest rate is the same, then yes, the shorter the term, the less time there is for interest to accumulate and the total amount you pay will be less.

But note that if you actually took out the 20-year mortgage but then overpaid at the level of the 15-year mortgage, then you would pay off the mortgage in 15 years, and so have paid the same in total.

That shows that there is an attraction of taking out a longer term, and then overpaying, because that gives you the flexibility to stop overpaying if your financial position changes in the future.

And, I can give a detailed explanation of how to calculate interest on a mortgage, but I'm guessing no-one's that interested smile given online calculators do it for you.

IsItMeOr Wed 14-Sep-16 17:05:45

That shows that there is an attraction of taking out a longer term, and then overpaying, because that gives you the flexibility to stop overpaying if your financial position changes in the future.

I've wondered before how useful that flexibility might be. I think it would be useful for covering things that were more than trivial costs, but less than you would be able to re-mortgage for anyway? I am assuming that banks wouldn't usually only lend a few thousand pounds as a mortgage - is that true?

We found an off-set mortgage worked well for us when we were building up our savings for an extension - while they were building up, we saved a lot of mortgage interest, and were able to pay off early.

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