our mortgage rate has one down but not so much the payments!!

[cerealqueen]

I don't understad how these are worked out but our mortgage rate has gone down by more than half... from 5.48% (seemed good at the time, it was five years ago) to 2.5% but our payments have not gome down proportionately, in fact, our payments have only gone down by just under quarter!! Can anybody morgage rate savvy help me understand why??

It all depends on how far into the mortgage you are and how long it has left to run. At the start of a mortgage most of what you pay each month is interest and only a fraction is the capital. The closer you are to the end the opposite is true, and a big reduction in interest rate therefore doesn't make a big difference to the total monthly payment.

An amortisation calculator like this one might illustrate it better.

I see what you are saying, i thought the load was spread across the term though.
We are five years in, I ran our stuf through a couple of more basic mortgage calculators when we got a letter about the rate and they seemed to say we'd be paying a couple of hundred less per month than has been quoted.

same happened to me, but it's all to do with how far through the mortgage you are and how much it is.

Mine went from 5.28% to 2.5% and went down by £110, which isn't much as a % of the payment. But I knew that it'd be about that. My dad who is financially minded said if you have a £100,000 mortgage and drop 1% you very very roughly save £50/month. I have no idea how he worked that out but he was pretty accurate for me. I know the term left also makes a difference. I knew we wouldn't save loads as we have 14 years left of a 25 year mortgage so in theory the interest % is less than it was a few years ago. all a bit too much for me to begin 100% understanding though, but I understand enough for me!

On the plus side I assume that if interest rates rise my payments won't go up too much! ie if they rise by 1% my repayment only increases by about £50/month.

In a repayment mortgage the payments are spread evenly across the term so that the lender gets the total interest and capital repaid. The interest is calculated on the balance of capital. Because the capital balance goes down, the amount you pay in interest reduces each year.

Example: A £200,000 mortgage taken out for 25 years @5% costs £1169/month (or about £14,000/year)
Year 1 - £10,000 in interest and £4,000 off the capital
Year 5 - £9,000 in interest and £5,000 off the capital
Year 20 - £3,400 in interest and £10,600 off the capital

So if the interest rate goes down the interest portion of the payment reduces but the amount you're paying off the capital stays roughly the same.

In my example, if someone had got to Year 5 and the interest rate went to 2.5% they would now have a 20 year mortgage with a starting balance of about £177,000 costing about £950/month.

If you're still confused, talk to your lender and ask for a redemption statement. See how much you still owe them.

thanks everybody, that has all been helpful, we were looking at it in very simplistic terms it seems!