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

Kind of depends when you bought though. Yes we will end up paying twice what we actually bought it for but house prices have gone up over 150% since we bought. So we and many who bought at a similar time to us are actually still profitable. Plus we have a secure roof over our heads and something to either pay for later care or give to the children.

When we had our first mortgage in the early 90s the advisor told us that our interest rate would be around about the 5% and might one day briefly go as high as 8%.

By 1997 it was 15%. It would have crippled us and ended us in negative equity at best if we hadn't been paying more off.

A friend working in the City told us to never go for anything other than a repayment mortgage and pay off as much as possible early. Which we did. Even a very basic calculation of the overall interest was shocking enough to make us determined to save every spare penny.

My sister took out an interest-only mortgage at the same time with the intent of paying off the lump sum of the original mortgage at the end with a policy that would give her the lump sum plus a nice little amount as a windfall.

She's still paying off her third mortgage as the policy meant to pay off the mortgage and give her a nice lump sum never worked out. She'll now end up paying her mortgage off in 3 year's time when she's 70.

My City friend said that anything other than a straightforward repayment was a con - they were being heavily pushed at the time - and the only people to benefit were the bankers.

My nephew took out a mortgage rate several years ago when it was 5%. As rates lowered to exceptionally low he's continued with his original payments. He has to pay an admin fee every few years when he locked in at lower rates but it's been a small amount. Now that the rates are back up he hasn't been hit so hard despite increasing his mortgage considerably to pay for improvements.

We were taught compound interest in school so I had a basic grasp of it but the old adage of not what you know but who you know literally paid for us.

Foundation maths does this. All students have to get grade 4 or re sit until 18.

The mortgage term is very long at 35 years. You are dragging it out. Hence the high amount of repayment.
Do some online simulations to see the effect of different length terms and you will see what the different outcomes can be. Keep the term as short as you can afford.

I really didn't pay attention in school I have no memory of this at all

I’m confused - this isn’t compound interest though? It’s not interest on interest…

it’s just paying of 6% every year over a long period on a decreasing sum of money cos you are paying off a small amount of capital each year.

all those saying compound interest should be taught in schools should probably also learn what it is?!

compound interest is what you get on a savings account - in year 1 you have £100 in it. Then you get 6% interest so make £6 and have £106 in there. Year 2 you get 6% interest on £106 so make £6.36 interest and have £112.36. Year 4 you make 6% on that and make £6.74 and so on etc. So you’re making more and more.

We didn’t either, we only bought for half what they offered us. We split our extra money between overpayments and building up a buffer, and once we had the buffer put as much as we could each year in the mortgage and then paid for chunks at the end of the fixed term

Exactly. In the first few years most of your payments go towards the interest on the debt and only a small amount of the capital is paid off as time goes on more and more of the capital is paid of and less in interest.

Even a teeny overpayment makes a difference. We have always rounded ours up to the nearest £100 even when broke, in some years that was only £15; normally about £80. It all helps.

Of course it's compound interest. Ffs

@Adviceplease123456

Compound interest is calculated based on the principal and already-existing interest from the previous period. For loans, compound interest may happen when interest due is not paid and then added to the loan's principle, which then builds upon itself, so repaying the loan takes more time.

This is what I was thinking.

Compound interest I think would be what causes problems with those equity release mortgages, but not a normal one where you pay the interest off.

I’m genuinely confused because I don’t understand that. Google says

“Compound interest is calculated based on the principal and already-existing interest from the previous period. For loans, compound interest may happen when interest due is not paid and then added to the loan's principle, which then builds upon itself, so repaying the loan takes more time.”

interest due is paid every month PLUS a small amount of capital. So the loans principle is never increasing?

But in a mortgage the whole point is that you pay the interest off every month - and a little bit of capital. So the interest doesn't compound.

If you didn't pay anything towards the mortgage then the interest would compound, but as you are paying it off it doesn't.

(Agreeing in fact with your words above but not your disagreement with Adviceplease!)

The loan principle is decreasing but you pay interest on the amount left to pay (which may include some of last year's interest depending on how much you pay each month/year)

This is from money saving expert website. Hope it helps.

The interest is 6% a year, not 6% in total.

It might make more sense if you scale down the numbers.

Suppose you borrowed £100 over 35 years at an interest rate of 6% per annum and paid back £7.50 a year (i.e. about 1/13 of the sum borrowed, equivalent to £15,000 on a loan of £200,000).

After the first year you would have paid back £7.50 but would have had £6 added in interest (actually very slightly less but let's not go into that level of detail). So you would now owe £100 - £7.50 + £6 = £98.50.

After the next year you would have paid back another £7.50 and would have had another £5.91 added in interest (6% of £98.50, keeping up the over-simplification for purposes of illustration). So you would now owe £96.91.

After the next year you would have paid back another £7.50 and have had another £5.81 added in interest. So you would now owe £95.22.

After three years you would have paid back £22.50 but your outstanding loan is only £4.78 less than the original sum you borrowed. This is why it takes you 35 years to pay it all back, and why you pay back well over twice as much as you borrowed.

Even doing a very crude calculation, 6% per annum x 35 years = 210%, so if it were simple interest, not decreasing in line with the sum remaining, you would pay 2.1 x the original sum in interest, so you would repay £200,000 + (2.1 x £200,000) = £620,000. It's only as low as £500,000 because the amount of interest accruing goes down each year because the sum you owe goes down. But it goes down very, very slowly in the first few years.

Mortgage payments definitely always cover the interest. It's literally the entire mechanism of how they work - you can't be paying off the principal if you haven't paid off the interest and if you didn't pay off the interest you'd never pay off the mortgage.

They might teach compound interest in school but do you remember every single thing you were taught in school? I certainly don’t and I never needed to know about it until 15+ years later when it actually affected my life.

Wow, that's awesome. We managed to fix earlier this year for 5 years at 3.89% when mortgages were going crazy. Best offset at the time was around 6%. You have struck gold. Thankfully, there's no 10% limit on overpaying our mortgage, so we're squirreling away in 5.5-7% fixed rate savings and then will lump sum if they come down. It's a hard time for new mortgages though and those without the equity to get the more decent rates.

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

it's 6% per annum - you want to borrow over 35 years

If possible you should try to see if a 25 year mortgage would work.

You pay an awful amount of interest in the first few years so it's better to overpay at the beginning of a mortgage term (which is unfortunately when people usually have less money, having just bought[.

Make sure you check the overpayment terms as lots of mortgages charge fees for this.

Except a mortgage is often less than rent, and you own the house at the end.
You’re right, makes no sense at all 🙄

Exactly, funny people telling OP she doesn't understand compound interest when they don't understand compound interest. Hopefully makes the OP feel a bit better.

I agree, that interest only with the standard endowment policies were a disaster for anyone buying after late 1980s. But my parents did do well form them (dad in his late 80s now). They benefitted with good investment returns and the “with bonus “ at the end of their mortgage terms . It made a nice lump sum to retire on for them. It was natural when we bought in late 1980s to go this route: it was the norm. The issue was that the endowments completely over estimated returns and interest rates rocketed in late 80s/early 90s.

we had 3 endowments on the go before the shit letters started about not having enough to pay capital off. We switched to repayment mortgage in early 2000s. We kept with endowments policy though (can’t remember why other than they came with life insurance and they weren’t a massive amount ) , until around 2006.

one day we really sat down and looked at what we could sell those endowments for. All advice at time was not to do this . However, the more we did the maths the more we realised that by selling them (not cashing in) , even at less value than they promised long term , we’d save a bloody fortune on interest and pay our mortgage off massively sooner. It meant we ended up paying the mortgage back over 8 years earlier than we would have done. We were mortgage free by 50. Overall we’d figured out mathematically that by time we’d pay mortgage off by cashing in endowments we’d be £10ks better off than sitting on repayment for remaining term and then taking cash lump sum from endowments at that point. In other words they had way more “value” to pay off then, then just holding onto them. And that’s because that lump sum cash would pay of capital not interest

so, in the end endowments did “pay” off for us, just, ..if not pay out as such.

and it reflects what folks say here. Pay as much as you can into mortgage as early as you can, overpay where possible. Always get a “flexible repayment mortgage “ where you can overpay, or take payment holidays (we had some of those too because of redundancy for a month or 2). Overpaying massively reduces the capital which means you pay off faster, and much less overall. As someone else says if you e got the option of an offset mortgage, where you can overpay but it sort of goes into a seperate savings account that you can then pull on to take a mortgage holiday in emergency, then that’s always a good option.

one thing that often overlooked. There are great mortgage deals out there when you have a low LTV. Once you can get your LTV to around 50%, re mortgage again and again to get the best deals going. We ended up on nearly breaking one building society who agreed to a 0.25% below base rate when base rates were at 4% in 2008, by 2014 we were paying them virtually no interest at all (0.25%) and that helped us clear the mortgage even quicker by keeping repayments the same. And that’s the other tactic. When rates go down, don’t reduce your payments.that overpayment is all capital paying off.

only other thing that takes as much precedence in your financial management is paying as much into your pensions as you can. Hey ho.