Help understanding mortgages

[Spjp]

Sorry if I am being naive.

I am in the process of buying my first home. Due to an old ccj I have to get a high interest mortgage rate of 7.24% fixed for two years. House is 115,000, 10% deposit so 103,500 plus 1500 product fee. Mortgage is £716 a month.

In two years time if I then remortgage (hopefully for a lower rate) how much will I need on a new mortgage please? I used a mortgage calculator but it's saying that you always pay the interest first, so in two years time I will need a mortgage for 102,900 so I have only paid interest for the whole two year and just £600 off my actual mortgage?

Is this right or am I misunderstanding?

It always takes a long time for the balance to come down in the first few years as you’re mainly paying off interest and not capital. It does eventually start to make a difference to the capital but you just need to keep plugging away at it. 2 years is only 24 payments so very little capital will be paid off. Your interest rate is high but hopefully in 2 years you can get a better deal. Use Martin Lewis website calculator and it will show you how much you’ll pay off each year. Your figures sound right given your high interest rate.

After 2 years you will owe approximately £101 700.

To simplify, I'm using 7% and £100000, plus £700 a month , not your actual figures.

In year 1, you will owe £7000 interest. You will make payments of £8400, so pay off £1400.
In year 2, you will owe £1400 less, so your interest (based on simplified figures) will be £6900, so you will pay off £1500 that year.

So basically each year you pay less interest and more repayments

It doesn't seem much in the first few years.

Thanks everyone 🙂

If you can afford to, this is where you overpay by as much as possible or as much as allowed.

Ie many mortgages allow max 10% total mortgage per year. So for you approx £10,000 a year max overpay the first year or about £830 a month extra. Ie you could pay £716 plus up to around £830 ontop every month. So you clear down the mortgage quicker and therefore pay less interest.

Every £ extra over the £716 you pay a month will reduce the interest, especially in the first 2 years

On a rate that high, just making small overpayments will really help reduce the capital too (keep other payments the same). Think of the overpayment as paying off your capital. Remember to keep the other payments the same and then those pay off more capital. The mortgage calculators and overpayment calculators on the money saving expert website are really helpful.

Agreed with this. If you even overpaid an extra £50 a month you'd add almost 50% to the amount of capital paid off at the end of 2 years, so very much worth considering.

There are some good mortgage overpayment calculators that will show you the difference between doing it and not.

I used a mortgage calculator but it's saying that you always pay the interest first, so in two years time I will need a mortgage for 102,900 so I have only paid interest for the whole two year and just £600 off my actual mortgage

It's not quite true that you 'pay the interest first' just at the beginning you owe more so the interest is more. The interest reduces as you pay down the mortgage. Also, if you're adding the product fee to the mortgage, that means that effectively you're taking out a mortgage for £105k so it's not quite as bad as only paying off £600, you've paid off £2100.

But either way, have you talked to a few brokers, ideally one specialising in adverse credit? That's quite an increase in rate for a single old CCJ, some years ago, I was virtually bankrupt with an IVA running but remortgaged out of it with a rate that was only about 0.5% above mainstream.

Have a look at London & Country at least - it's an online broker where you can enter your details and see what rates you qualify for.

The other thing you have to be mindful of is fees. On a relatively small mortgage a £1500 fee adds £63 a month to your mortgage so it might be worth paying a slightly higher rate for a fee free product, also when your CCJ drops off your record look at 5 year products as are often cheaper overall.