My monthly mortgage payment is GBP965. Of that, monthly interest varies from GBP714 to GBP770. The annual interest rate 5.64% and the remaining term is just under 27 years, five years fixed.
Clearly the interest is currently much more than 5.64%. What’s the calculation here?
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Mortages charge interest based on how much is left on the loan.
The key though is your monthly payment is fixed, so you’ll pay more in interest at the beginning of the loan vs at the end.
So for the sake of simplicity lets assume you owe $100,000 at 5% and your monthly payment is $500
Your first payment will be $100,000 * .05 / 12 = $416 in interest
$500 – 416 = $84 in principal
Where-as when you have $10,000 left on the loan
Your payment will be $10,000 * .05 / 12 = $41.66 in interest
$500 – 41.66 = $458.34 in principal
So the key to saving money on a mortgage is to pay down that principal as quickly as you can.
If your mortgage allows you to put down extra cash payments, and you can afford to put an extra $1000 down near the beginning of the mortgage it will save you a ton of money in the long run.
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