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Original poster

How is this possible - mortgage

195 replies

Mortgageh · 18/10/2023 20:00

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

OP posts:
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7
FrancisFriedFish · 19/10/2023 21:17

MontyDonsBlueScarf

That is a great suggestion to help pay off quicker but, be cautious, only consider if you are extremely disciplined with money. If you are likely to spend the additional money that you borrow you could end up in one enormous mess. If your a cautious and risk adverse type, this could work well and save your thousands.

NellyBarney · 19/10/2023 21:24

gotomomo · 18/10/2023 20:21

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

A mortgage has no compound interest. Compound interest is if you save money, so you get interest on your interest and so on, so interest payments go up. With a mortgage, interest payments reduce over time, as you pay off your balance over time.

BasiliskStare · 19/10/2023 22:26

@NellyBarney I agree with you , but it depends if you pay off some of the capital - that makes a difference ( with a mortgage ) , not all mortgages are like this so eg interest only ) But to go back to original point work out what interest rate is over time & maybe it is just what you can can afford at the time & then maybe chip away at it. Or just at some point downsize or down cost

ImADevYo · 19/10/2023 22:37

BasiliskStare · 19/10/2023 18:32

@ImADevYo

But what a useful thing for young people to learn. My son learned it in Maths at junior school & it may have been hidden but lovely teacher just told them - this is why this is important.
It may amuse you to know that his biology teacher once said in front of the whole class. "Children - you are all going to die " ( She was trying to explain about lifespans of different mammals ) This would have been great if there had not been a trip round the school with parents who were passing past the classroom.

Hahahaha!
The biology teacher's statement was quite useless. What use was it? They'll figure it out sooner or later.

While things may certainly be 'useful' how many kids even paying attention in class. So many are incapable of even basic arithmetic. Do you think they'll remember compound interest?

I do think there should be financial literacy 'taught' but not to children at school wasting precious teaching time. To young adults - a free online course. It'll belre relevant then as well

LovelyLisa2 · 20/10/2023 10:01

From somebody who paid 17% in the 90s. That is nothing. We paid 70% of our salaries to the mortgage

SecondUsername4me · 20/10/2023 10:37

LovelyLisa2 · 20/10/2023 10:01

From somebody who paid 17% in the 90s. That is nothing. We paid 70% of our salaries to the mortgage

Yes but back then, most mortgages could be obtained on a single salary, and homes weren't the multiples of the average salary they are now.

Lattims83 · 20/10/2023 10:40

BC it's compound interest and most mortgages are front loaded so you pay more towards interest in the beginning than the mortgage. Also, keep in mind rates are high now but they have to go down, so if you get a 2 year mortgage you can remortgage at hopefully a much much lower rate in 2 years, this is what we are doing, you can also make overpayments of 10% usually every year.

Lastly, your entire term is 35 years. This planet will likely be dead and on fire long before that so you very likely won't end up having to pay the full amount, if that's any consolation.

Cornishclio · 20/10/2023 11:01

The longer the term of any loan the more interest you will pay. It is 6% every year so over 35 years you will pay way over double the amount of the total mortgage. In the early years the balance won't go down by much either so you will not be reducing the amount borrowed due to the amount of interest. So in year 1 the interest will be around £12k on £200k mortgage so your £1250 monthly payment will be £1000 interest and balance reduces by £250.

pinksocks3 · 20/10/2023 11:52

This is why long terms are a bad idea, you are paying less per month but loads more interest.

Adviceplease123456 · 20/10/2023 12:15

Lattims83 · 20/10/2023 10:40

BC it's compound interest and most mortgages are front loaded so you pay more towards interest in the beginning than the mortgage. Also, keep in mind rates are high now but they have to go down, so if you get a 2 year mortgage you can remortgage at hopefully a much much lower rate in 2 years, this is what we are doing, you can also make overpayments of 10% usually every year.

Lastly, your entire term is 35 years. This planet will likely be dead and on fire long before that so you very likely won't end up having to pay the full amount, if that's any consolation.

Edited

It’s not compound interest!!
With most normal mortgages and definitely the one the OP has, you are always paying off the full interest due each month AND a bit of the capital. Compound interest is when you don’t pay off capital and you don’t pay off all the interest so then you have interest on an INCREASING base capital!

ie you borrow £100 at a 6% interest. You owe £6 interest.
if you only pay off £5 in year 1, the next year you pay 6% interest on £100 capital PLUS 6% on the £1 you didn’t pay off. So you now owe £6.06 interest. That is compound interest.

the OP WOULD be paying off the full interest due PLUS capital.

Adviceplease123456 · 20/10/2023 12:20

Maybe an easier way to think of it is to think of the mortgage company as a person who is saving money. They have put £150k into a “savings” account (the OP’s bank). The op has promised to pay a rate of 6%.
if the bank just left it there for 1 year the OP would pay 6% interest for just the 1 year.
but they had an agreement to leave it there for 35 years so the op has to pay 6% to them every year. Just like a savings account would.
min actual fact the OP also lays them back a little bit each month so they give them 6% of a slightly lower amount

FatherJackHackettsUnderpantsHamper · 20/10/2023 19:20

That's a very good analogy - except that the money that the mortgage company is 'saving' only came into existence at the point when you borrowed it!

Tiredalwaystired · 21/10/2023 21:26

Ringdoodledumpling · 19/10/2023 17:30

It’s also why people who say ‘I paid £100k for a home, sold it for £120k and made £20k profit’ are talking out of their arses. Unless you paid cash you still made a massive loss in real terms.

Although if house prices increase quickly and they sell relatively quickly they can still make a profit.

Ringdoodledumpling · 22/10/2023 07:55

@Tiredalwaystired they can as long as they don’t have to spend too much to achieve the flip

Lattims83 · 22/10/2023 12:01

Tiredalwaystired · 21/10/2023 21:26

Although if house prices increase quickly and they sell relatively quickly they can still make a profit.

Show quote history

People who sold during COVID prob made a profit. We purchased our house for 670k in 2019 and sold it in 2021 for 875k. We had 100k of equity as well so we made a profit which allowed us to now purchase a much better house in 2023. I know plenty of others in the same position. Just look at Rightmove data for houses sold between 2020 and 2022, most made a profit.

Lattims83 · 22/10/2023 12:11

Adviceplease123456 · 20/10/2023 12:15

It’s not compound interest!!
With most normal mortgages and definitely the one the OP has, you are always paying off the full interest due each month AND a bit of the capital. Compound interest is when you don’t pay off capital and you don’t pay off all the interest so then you have interest on an INCREASING base capital!

ie you borrow £100 at a 6% interest. You owe £6 interest.
if you only pay off £5 in year 1, the next year you pay 6% interest on £100 capital PLUS 6% on the £1 you didn’t pay off. So you now owe £6.06 interest. That is compound interest.

the OP WOULD be paying off the full interest due PLUS capital.

Show quote history

The most common kind of mortgage in the UK is compound interest.

https://www.themortgagehut.co.uk/expert-articles/equity-release/294/understanding-compound-or-rolled-up-interest#:~:text=simple%20interest-,Compound%20interest%20(sometimes%20referred%20to%20as%20'rolled%20up'%20interest,on%20UK%20loans%20and%20mortgages.

"Compound interest (sometimes referred to as ‘rolled up’ interest) is by far the most common form of interest on UK loans and mortgages. It is a fair system of interest calculation though more complicated mathematically.

Simple interest means the interest is calculated on the start value of the loan (called ‘the principle’) and never changes throughout the term of the loan.

Compound interest is recalculated as the loan is paid back, making it a more accurate reflection on the loan in current terms."

Understanding compound or rolled up interest

Understanding your interest rate and how the interest is calculated is important if you want to tell a good deal from a bad one.

https://www.themortgagehut.co.uk/expert-articles/equity-release/294/understanding-compound-or-rolled-up-interest#:~:text=simple%20interest-,Compound%20interest%20(sometimes%20referred%20to%20as%20'rolled%20up'%20interest,on%20UK%20loans%20and%20mortgages.

cardibach · 22/10/2023 12:21

TeenLifeMum · 18/10/2023 20:48

If you think how much a house cost 35 years ago you probably still make your money back but 1200 on mortgage v 1200 on rent can be argued you get something at the end. With rent, and a decent landlord, you get piece of mind along the way that if the boiler goes it’ll be fixed regardless of your financial position.

The bit that sways me to ownership is what happens when you retire and still have to pay rent? That scares me.

Exactly. I semi retired at 55 because with no mortgage or rent to pay I can manage to do so. If I still had to pay out rent every month I’d be stuffed.

LakieLady · 22/10/2023 13:02

LovelyLisa2 · 20/10/2023 10:01

From somebody who paid 17% in the 90s. That is nothing. We paid 70% of our salaries to the mortgage

I recall a friend thinking I was mad when I took out a fixed rate deal at 13.25%. A year or two later, she was paying 17.5% on her mortgage.

VanGoghsDog · 22/10/2023 16:22

Lattims83 · 22/10/2023 12:11

The most common kind of mortgage in the UK is compound interest.

https://www.themortgagehut.co.uk/expert-articles/equity-release/294/understanding-compound-or-rolled-up-interest#:~:text=simple%20interest-,Compound%20interest%20(sometimes%20referred%20to%20as%20'rolled%20up'%20interest,on%20UK%20loans%20and%20mortgages.

"Compound interest (sometimes referred to as ‘rolled up’ interest) is by far the most common form of interest on UK loans and mortgages. It is a fair system of interest calculation though more complicated mathematically.

Simple interest means the interest is calculated on the start value of the loan (called ‘the principle’) and never changes throughout the term of the loan.

Compound interest is recalculated as the loan is paid back, making it a more accurate reflection on the loan in current terms."

Show quote history

All that shows is that "The Mortgage Hut" also doesn't know what compound interest is.

They are correct that is how mortgages are paid, and loans, but they are incorrect that this is an example of compound interest. There's presumably a name for it. But compound interest is not that name.

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