How is this possible - mortgage

[Mortgageh]

If I take out a mortgage of £200k over 35 years with an interest rate of 6%, my monthly payments would be £1250. This would mean I'm paying nearly £500k?!!

It's my first time doing something like this and I'm really confused so just wondering if anyone can explain this, thank you

I haven't done the maths, but that may well be right. I remember when I was young my mum (who lived through the crazy 80s interests rates) would say that you usually pay for your house twice by the time you pay off your mortgage.

Your problem is the long term of the mortgage. If you can pay it off over 25 years the total spend won't be as bad.

It just doesn't make sense to me how the interest can be 6% but I'd be paying over 100%

It's because it's compound interest

What does that mean please

Because at the start of your mortgage, you're pretty much just paying the interest (less than 2k balance cleared in the first year on your mortgage). If you make overpayments/ reduce your term, this will reduce interest substantially. See https://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator/

Those who doesn’t understand compound interest are doomed to pay it!

You’re paying 6% per year. Not 6% over the whole period.
Its not quite as simple as this but in the first year when you still owe almost all of the £200k, you’ll pay 6% of that £200k which equates to £12k in interest. So £1k per month is interest and £250 off of the debt. I spose the second year you’d pay say £10k in interest. It would be lower each year as you pay more off. So although it’s always £1250 per month, at the beginning, most of that is interest and towards the end most of it is again the debt.

Interest is 6% of the remaining balance, every year

Eg 200k *6% = £12k of just interest in rhe first year, and you only pay off £3k of the actual loan

SIMPLIFIED EXAMPLE

Second year = 197 * 6% = £11.8k interest, £3.2k off the loan

Third year = 193.8 * 6% = £11.6k interest, £3.4k off the loan

So you've paid £35k interest just in the first 3 years.

Payments are set so that they are fixed over the term & the proportion that pays interest falls gradually.

That’s why you should overpay whenever you can. Even a few k off saves a lot over the years.

Lower the mortgage term if you can & over pay as much as possible without penalty

It sounds about right. DH and I overpaid a lump sum of £60,000 and by that shaved 4 years off the term and saved double the amount in interest. Ours is at 5,4% and the term was 28 years. You could focus on overpaying to reduce the interest.

Compound interest is interest on top of interest.

The rate is 6% per year.

So
£100 -> £106 -> £112.36 -> £119.10 and so on increasing by 6% each year

But you actually pay some of the balance (and interest) off each year.

So it'd be more like this if you pay off £10 each year. Interest is applied, then your payment.
£100 -> £106 -> £96 -> £103 -> £101.76 -> £91.76 -> £97.27

So your payments lower the amount of balance relative to the previous year, but the interest is still applied to that balance and needs clearing.

This is why overpayments are so effective at clearing mortgages quickly - because it clears additional balance, and isn't partly used on interest like your normal payment. Assuming you don't have an interest only mortgage of course.

There's lots of calculator's and resources online to learn from. Money saving expert can often be useful.

And people bash people who rent their home, and say 'renting is dead money!' LMFAO! 😆 Buying a home, and paying a quarter of a million back more than you have borrowed in the first place (even more in some cases,) now THAT is dead money. And you're paying your mortgage until you draw your pension in some cases. Yep, sod that. People renting social housing have the best deal out of anyone else these days.

As people have said @Mortgageh it's compound interest. And yeah it IS possible and it IS right. Shit isn't it?! And we are all encouraged to buy a property. Very few people get any advantages from buying now!

Think of it this way, if you didn't pay off your loan, at the end of the 35 years, you would have paid 420k in interest + the original loan = 620k. You are only paying 500k as you will be reducing the loan over time and therefore it will attract less interest. If you pay the loan off sooner, you can significantly reduce the total payable. Have a play around with a mortgage calculator and you will see the difference.

This demonstrates how people get into debt. Compound interest should be central to the maths curriculum, far more useful than quadratic equations or trigonometry!

That's probably about right.
When I did the maths on a slightly lower interest rate, over 25 years the repayments came to about twice the mortgage.

Borrowing money is expensive. Unfortunately buying a house is one thing most people cant/don't save for up front. It's the only thing we've ever paid interest on I think.

And yes, the reason is compound interest.

Have you looked how much it would cost over a 25 year mortgage?

Are you spectacularly bad at arithmetic?
'Most' people don't get social housing or enough housing benefit to cover the rent - if they even qualify for it.
If you rent all your life you're likely to be paying at least the same as a mortgage. But no house at the end of it.

I don't think buying is the right choice for all situations but you can't get away from the fact that unless you qualify for social housing you'll be at the mercy of the insecure rental market.

Oh my goodness thank you all so much, I had no idea it was 6% every year!!

Can't choose a singular post to reply to as they're all so helpful, I really appreciate it.

A quick check on a mortgage calculator says that if you make it a 25 year term, you pay about £140 more a month but at the end you have paid off 386k, which is a lot more reasonable than your 35y deal. It just depends whether you can afford the extra monthly payment.

How long is the rate fixed for?

Hopefully interest rates will have gone down by the time your mortgage deal ends and ideally you can re-mortgage for a lower rate so you won't be paying 6% forever.

It is but people don't bother to pay attention.
People who do pay attention are also probably capable of Googling and understanding the very simple examples on several sites like MSE, moneyhelper.com and the like.

Surely compound interest is covered at gcse, certainly was at o level, probably year 7/8

Absolutely!!

I’m sorry, I’m not trying to be mean but what do you mean by this?

Are you saying that you expected to take out a 35 year mortgage and pay the bank a total of £12k in interest over that period (£200k x 6% = £12k)? So the bank will make a profit of £29/month?

Surely you realise that just isn’t possible?

Have you read of the recent interest rate increases? Why do you think people are so worried?

I’m a maths teacher and compound interest is a large part of the secondary maths curriculum - whether people pay attention is a different thing!