How does a mortgage work?

[GingerMaman]

Hi,

I feel embarrassed asking this question because I feel I should know this already!

If we take out say a 200K mortgage at a fixed interest rate of 4%, say over the period of 20 years, how much in total would we be paying the bank over the course of 20 years?

Thanks!

You'd pay back £290,871 over 20 yrs according to money savings expert

Sadly you can't get 20 year fixes. If you could I would definitely be signing up to fix at 4% for 20 years.

Thanks

I'll have a look over at MsE

There's a BBC mortgage calculator here that will show you the monthly payments for a given borrowing at a particular interest rate over a period of time.

The Money Saving Expert site has a different calculator here which shows you how the debt reduces over time and how much you'll pay in total.

Thanks cogito, that's perfect!

have a look at the spreadsheets thread on this board - you can put in your numbers and SEE what happens to the balance

Don't look at the final repayment figure - it's apt to be a bit depressing. The critical thing with mortgages is a) can you afford it today, next week, next month and next decade and b) are you buying something which at least will HOLD it's value and preferably increase it. So your house that you pay the bank 290,000 for could be worth say 350,000 when you've finished paying for it.

which is why my spreadsheets, that show month by month and year by year what is happening are a good visual aid for such things ...

Stupid question maybe - at the end of the first five years of a 25 year mortgage, assuming no over or underpayments, would you expect to have paid off 20% and owe 80% of the original value? Or do you pay more interest/less capital at the beginning and the reverse towards the end?

No you would pay well under 20% off the capital. The interest rate is a percentage, so for ease say you have 100k mortgage. Interest rate 4%. Every year you pay 4% off the remaining capital as interest. So in the first year 4% of 100k is 4000. So 4000 of your mortgage payments is just the interest - the first few years you pay little off the capital. If you say that interest rates were to stay the same then nearer the end of the mortgage term when you have, say 10k left to pay then 4% of 10k is only 400 so you're paying massively less interest but payments are the same so much less comes of thr capital at the end with the same repayments and interest rates. This is why if you can mortgage overpayments are usually well worth it!
I hope that makes sense!

Thanks that makes sense - we have overpaid but the loan shrinks frustratingly slowly!

slowcomputer
have a look at the mortgage spreadsheet on my spreadsheets thread
over on the right hand side is the repayment mortgage numbers
so you can see how the balance of interest and capital changes

BUT
if its an interest only mortgage ... trhe balance NEVER reduces

With our first mortgage, we owed more than the original mortgage after the first 2 years! Interest kept going up (was about 14% as I recall) and we couldn't afford higher repayments, so in those days (late '70s) the building society just extended the term instead.
At one point our term was 38 years!

???
that does not make any sense at all
I've had mortgages since the 80's and cannot work out how you end up owing more unless you miss payments
in the 70's all loans were repayment

You should try reading what people write Talkinpeace... The PP said 'we couldn't afford higher repayments' so the mortgage was rescheduled over longer and longer periods of time, adding more interest in the process. So it would be possible at points to owe more than originally taken out.

Cogito
i read what they typed, but wonder how that fits in with contract law even that dating back to the 1970s

Interest rates skyrocket, the mortgagees payments stay low, the term extends..... the mortgage may have been repayment by name but it would have been pretty close to interest only in effect. Like having a credit card charging £6/month interest but paying back the minimum of £5....

This help?
We've made a three minute film explaining mortgages. hope it helps!

www.online.citibank.co.in/products-services/loans/pop-up/home-loans-emi-calculator.htm?eOfferCode=INHOLOTMMHLEM

Click Above will show you the monthly payments for a given borrowing at a particular interest rate over a period of time.