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'm glad a couple of people have said this, I thought I was going mad!

This is simple AER, nothing to do with compound interest. And probably wasn't taught in schools to be fair.

This it is covered. Interest isn’t difficult to understand… and it is taught.

@AlexaCanYouHearMe

Noting interest rates go up again and again and again…. I will just leave this here….

https://www.mumsnet.com/talk/ami_being_unreasonable/4923157-landlord-wants-to-increase-rent-by-20

6%/year is 0.5%/month.

In your first month you owe 0.5% of £200,000 = £1,000 interest.
You pay £1250 so the debt is reduced by £250.
The next month you owe 0.5% of £199,750 = £998.75 interest
You pay £1250 so the debt is reduced by £251.25
The next month you owe 0.5% of £199,498.75 = £997.50 interest

and so on.

I know a few people have said it now. But it's not compound interest. Worrying how many are so convinced it is

Yes, there should be finance education, just as important as sex education.

There is also the housing co-operative model. It's not common these days but it is viable alternative for people who are willing and able to organise it.

@AlexaCanYouHearMe

DM has an assured tenancy in a 3 bedroomed SH property. She is retired. Her rent is paid in full via housing benefit. She doesn't worry about replacing or repairing her windows/doors/boiler/roof. Her kitchen & bathroom have been replaced.

DMIL owns her house. She is also retired. Her house has fallen into disrepair. Her windows and doors are rotten. Her boiler has seen better days. Her roof has a small leak. She has no chance of affording these repairs now, despite her mortgage being paid off, because a state pension isn't enough to live on, and she has chosen to release equity from her home to help support herself in her old age.

I know which situation I'd rather be living in as an OAP, so on balance, I have to agree with you.

Back in my day, compound interest was taught in junior high maths. I’m taking it this has changed somewhere along the line?

OP it looks really daunting at the beginning of the mortgage but after several years of paying the mortgage the rates might come back down. This is the time to overpay as much as you can every month. As wages increase over time the payments do become easier. As DC grow up and leave home it gets easier again. The more you can overpay the more years you can shave off at the end.

You will probably be able to product transfer with your current lender onto another fixed at a lower rate than SVR

I'm thinking of something even more basic!

There is also inflation to consider. £200k today is worth a lot less in real terms in 25 years time. So the value of your loan reduces while the value of your house increases. It all evens out, though the bank needs to make a profit margin.

As offset mortgages have been suggested, here's an even better way to use them. Borrow large amounts from anywhere you can get them at a lower rate of interest than you're paying on your mortgage, put the money into your offset account, and let someone else's money lower your mortgage interest payments. When the term of the loan is up, pay it back from the offset account and look for another loan to do it again. You need to be disciplined and careful but it works a treat.

This will be harder to achieve now that interest free credit card advances aren't so readily available, but if you can find deals where the numbers work it can save very significant amounts.

On a different note. Is 6% the cheapest rate you can get? I've seen deals at much less than 6%.

Having now seen the process of several relatives needing care I would much rather have the money to pick and pay for somewhere nice than being at the mercy of the council. That sort of asset provides choice and I wouldn’t be scoffing at that.

But the choice isn't between an assured tenancy or buying. It's between private rental (with ever increasing rents and the possibility of being kicked out at any time) or buying.

If social housing was so easy to get your house owner DM could easily sell it and get allocated social housing... Why doesn't she do that? Cuz there aren't many.

Even where I live a decidedly down-market area people have been waiting years for social housing. No 'normal' family stands a chance even those in band 1 meaning they have severe issues (disability/domestic abuse/etc) wait 2 years at least.

Also not really the point of the thread but companies are constantly trying to build on our greenbelt... Expensive executive housing with very little affordable.

I have no idea why a) Anybody would want to buy that when we have so many other houses for sale and b) Anybody who can afford those prices would want to live over here!

Ridiculous.

All we need is someone to say they "pound cost average" into their mortgage as they pay it monthly. They've watched a YouTube on it

Can I just add to the discussion @Mortgageh ?

No that you’ve got a handle on the downside of compound interest (debt) you also should consider it from the other side (profit). All the above is also true when it comes to gains on saving/investments. That’s why it’s best to start saving and investing even small amounts early.

Alexa does have a point re SH. I've just done a quick/rough calculation and the rent I will have paid over 45 years comes to 350k approx (I won't have to pay in retirement). So the actual house price I could have bought would have been what? Going by the 2.5 calculation that would give me a house costing 140k. Not much choice at that price.

I've been in my house for 20 years and my rent now is only £15 a week more than it was when I moved in. Added to that my house is actually worth around 750k (mainly due to it being in London).

So yes, in my situation I don't feel the rent is "dead money". I've got to live in a nicer house and area than I could have ever afforded, with all major maintenance covered by the HA.

It's an option I wish was available to more people. My Dsis is at the mercy of private rented and it's horrific.

OP you won't necessarily be on 6% for the lifetime of the mortgage. You stay on 6% til your fixed rate ends then look for another and hope its lower.

I took out a 35yr mortgage when I bought, but I was 23 so was comfortable with lower monthly repayments and still getting it paid off before 60. We are now 38 and 15 years in. We are more well off now, and have managed to get lower interest fixed rates over that time, so I overpay every month. Whilst at the start the majority of the monthly amount goes on interest and a small amount off the capital, I'm now in a position where less than a third of my monthly payment is towards interest and the bigger chunk is off the capital.

Very simplistic and not quite right. The depressing thing is if you rent at £1k/month, and pay it from age 30 to age 90, your housing will have cost you 720k by the time you die. And you will have to find that rent right till you die. It might cost you £500k for your £250k house but it will be free to live in for your non-working, elderly years, and you have a big asset. So essentially the dead money is only £250k.

Not to mention the cost of moving house and the risk of getting handed notice on your home.

Your glee is misplaced.

You’ve also forgotten that plenty of people overpay and/or pay back early. That makes a massive difference to the cost of interest.

@AlexaCanYouHearMe you are spot on.