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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Given that people have explained the math to you here’s why it’s mostly interest now:
1. Assuming your rate and period of repayment are fixed, You are going to be paying back X amount every month for Y years.
2. Early on in your mortgage, because of the amount you owe and the span of time over which you owe it, the amount of interest that you’re paying (Annual Interest rate * X) is more than the amount of principal you pay off per year. This is call ‘front loading’ the interest. As you pay off more and more of your mortgage, the amount of interest you pay relative to the principal becomes less even though your payment per month stays the same.
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.
The 5.64% is an ANNUAL rate. Take your principal at the beginning of the year, take 5.64% of it, then divide by 12, and that’s about what you’ll pay in interest every month. Some back-of-the-envelope math says that you borrowed somewhere around GBP 165,000 ?
Every month, the principal goes down a little, so every month you pay a little less interest on that principal, and you pay a little more toward paying down that principal. Then, the next month the principal goes down by just a little bit more than it did the previous month.
If your mortgage allows it, you can speed this up by paying a little bit more every month. That’s a great way to knock years off your mortgage.
Pay extra on your principle every month and watch the interest dwindle rather quickly over time.
So what do you owe, about 150k+-ish?
(Outstanding balance) * ((interest rate) / 12) = 1 month of interest. Your interest per month goes down as your balance goes down.
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