How is mortgage interest calculated?

[whatsupsunshine]

Hey all

Could some wiser person than me please explain how mortgage interest is calculated?

Until this morning I believed that a 6% interest rate was 6% of the house price. But clearly I have that very wrong. When using online mortgage calculators or reading articles they all say essentially with a 6% interest rate on a fixed 30 year mortgage you end up paying almost as much interest as the actual payment for the house. But I don't understand how that is 6%? Surely that's more like 100%???

what is the 6% of? Could someone break this down for me.

Thank you from a confused woman who I guess won't be buying a house any time soon and should have paid more attention ins school.

You pay 6% of the amount you borrow in interest every year.

6% on whatever you owe the bank. But it's compound interest which is more complicated.

This gives a good explanation:
www.moneysavingexpert.com/mortgages/types-of-mortgage/#:~:text=In%20the%20early%20years%2C%20your,pay%20%C2%A3877%20a%20month.

It's 6% of the amount you borrow, every year.

So easy example without checking maths, if you borrow £100,000 you are charged 6% in the first year which is £6,000. So you now owe £106,000. But during the first year you have made repayments of £10,000, so take that off what you owe - £96,000. That's your balance at the beginning of year 2. In year 2 you are charged 6% on £96,000 which is £5,700 so you owe £101,700, less say another £10,000 repayments making £91,000. Which then has another 6% added et
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If you can't get your head around the maths of it, but just want to know how much monthly repayments if overall cost of borrowing x, you can use Nationwide Bank's mortgage calculators. You can keep changing details to check out different scenarios & look at how over payments help you.

As others have said, it's that amount per year.
Increasing the term increases the amount of interest due.

At current rates, paying back twice what you borrow over 25 years is about right.

This is why the small changes in interest rates affect home owners (on variable rate mortgages) so much. Interest rates going from 1% to 5% makes a massive difference to payments, because it affects every year you borrow he money for.

Thank you everyone!!!it's very kind of you to help me figure this out. I am still bemused. So following the math the interest is 6% of what you borrow annually - I believe this should be right:

House price- $500,000
Down payment -$100000
Mortgage - $400,000
Divided by 30 years is $13,333 a year (rounding down)
6% of 13,333 is $800 rounding up.
So total payment should be $1171.75 per month

But when I put it in to an online calculator, monthly payments (just loan and interest, not tax or anything else) are $2398.20

What am I missing here?

Here is a screen shot of one- and the listing I am looking at on Zillow also estimates monthly payments as double then what I am getting from the sums I am doing - as laid out above.

6% of 13,333 is $800 rounding up.

This line is your error.

It's not 6% of the annual payment. It's 6% of the total outstanding balance. Every year. So in the first year, 6% of $400,000.

It is 6% of what you have borrowed (400k), not 1/30th of what you have borrowed.

The interest is compounded , so added every month as in the example above . So mortgage of £400,000 , 6% a year is 0.5% a month.
in month one you owe 400,000 , interest is 0.5% of 400000 = 2000, , so if your mortgage payment is £2398, then you only reduce the debt by 398 in month 1. So in month 2 you owe 400,000 - 398 , = 399602, then interest of 0.5% on that =1998,so if your payment remains at 2398, then you reduce your debt to 399602- (2398-1998) = 399202

This!

If you failed to make any capital repayments your interest over 25 years would be £18,000 (6% of £300k) x 25 = £450k. It would be more than this due to compound interest but you get the idea.

This is why it costs almost the same as the price of the house.

Yes, as others have said, the interest is due on the amount that you are borrowing, not on the amount that you are paying back.

Ahhhh ok I see. Thank you everyone. I understand now!

Also, mortgages are set up so that you barely pay off any capital in the first few years, most of the money you pay is just interest (and a tiny bit of capital). As the years go on that changes & you start paying off increasing amounts of capital.

One way to pay more capital off the loan in the first few years is to make overpayments on the mortgage, if you can afford to.