Eli5: Mortgage rates

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I have a mortgage of £85,000 with £20,000ish paid off on a 30 year term (variable rate).

My initial monthly payment was around £330 per month but have been creeping up with interest rates, it’s now going up to almost £430 a month (£50 since the last rise two months ago). I just don’t understand how they can calculate this amount of difference in repayments..

Can anyone explain?!

I’ve been advised to ride with the repayment increases as it’s not a great time to remortgage, any other advice would be appreciated 🙏

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>My initial monthly payment was around £330 per month but have been creeping up with interest rates, it’s now going up to almost £430 a month (£50 since the last rise two months ago). I just don’t understand how they can calculate this amount of difference in repayments.

I will just note that UK mortgages are unique, and you should be cautious taking answers from non-UK folks. Generally, what’s happening is that interest rates have risen quickly, and you have a variable rate mortgage. Since much of your payment is going to interest, rather than principal, when interest rates rise your payment rises fairly rapidly, that is when interest rates go from (for example) 4% to 6% your payment will increase much more than 2%, because something like half of your payment is interest and interest rates have gone up 50%.

Interest rates are rising quickly everywhere due to the efforts of central banks to bring down inflation. Essentially, the central bank in the UK is making it more expensive for regular banks to borrow money. In a sense, those regular banks borrowed the money for your house from the central bank, so they’re seeing the exact same kind of squeeze you’re seeing, only they can pass it on to you by raising your rates.

Every bank is getting squeezed like this, so it will be impossible to find a rate like the one you had a few years ago. However, it could be worth it to talk to a competing bank to see if they can offer you better than your current bank. In an era of rising prices, some businesses will try to raise theirs higher than necessary and hope nobody notices, and the best way to police this is with competition.

When you make the required monthly minimum payment, you are paying towards both the principal (loan amount) and the interest added.

At the beginning, the majority of the payment is going towards the interest and then the ratio slowly changes so that towards the end, it is the principal that is what most of the payment is for.

When the interest rates change, they look at how much principal is left and then redo the payment amount with the new percentage and years left. So, if you have $65,000 left and you’ve been paying for 5 years, then it’s the same math as a $65,000 loan on a 25yr repayment. So look at how much principal is left on the loan and then the time left on the 30 years.

Now, your monthly payments are sometimes locked in until you hit a “trigger” where the monthly payments need to be adjusted. If it isn’t adjusted, then you keep paying the same monthly but then have balloon payments or longer payoff length (more than 30 years).

>I just don’t understand how they can calculate this amount of difference in repayments..

Amortization tables and calculators. U.K. is probably a little different, but in essence an amortization table shows the relationship between your total mortgage amount, your interest rate, your remaining principle amount, your loan length, and your monthly payment. Change any part, such as your interest rate, and the table can be rebuilt showing the effect of that change. If your interest rate goes up, the table will show how your payment is affected, based on how much longer you have on your loan and how much of the principle you’ve paid off.

Which leads me to a big piece of general advice. Overpay and make sure that your overpayment is applied to principle and is not applied to your next payment. Even small reductions in your principle can have a large effect on your length of payment, which in turn reduces the amount of interest you pay.

Find a good amortization calculator online and play with the numbers. Find out what happens if you overpay £50 per month, for example.

What complicates the mortgage APR is that you are paying interest on the interest. How the APR works – https://youtu.be/a22RkoupEgE