# Interest Only Mortgage



## emmacollins7 (8 Jul 2010)

Hi, I am on a variable mortgage with KBC and I have been paying interest  only since June of last year. I have recently discovered that they are  charging me interest on the capital that I am not currently paying as  well as the interest I am already paying. Are the banks allowed to do  this? As this means that I am paying two different interest.


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## Howitzer (8 Jul 2010)

What is your outstanding mortgage (M)? What is your interest rate (IR)? What are you currently paying per month (P)?

For an Interest Only Mortgage it should be: P = ((M / 100) * IR) / 12


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## emmacollins7 (8 Jul 2010)

Hi Howitzer,

Your calculation works out as the correct amount that I am paying each month on *interest only*. However, the bank has informed me that when I start paying back the borrowed amount including the capital, I will be paying more as I have not been paying any of the capital off since June of last year. Which means that the capital is incurring more interest as it is not being reduced. Is this common practice?


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## LDFerguson (8 Jul 2010)

Hi Emma, 

I think the reason that your repayments will be greater will be due to the fact that you're repaying the capital over a shorter time period once the interest-only period finishes.


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## emmacollins7 (8 Jul 2010)

surely I'd be paying less if I'm paying over a shorter period of time?


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## LDFerguson (9 Jul 2010)

You'll pay less interest overall but your monthly repayments will be higher as the capital has to be paid off in a shorter period.


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## DoctorEvil (9 Jul 2010)

I think what the bank are saying is that the term of your mortgage hasn't changed.

Lets say last June you owed 100,000 capital with 20 years remaining.
You went interest only for 12 months.
When this ends you still owe 100,000 but now over 19 years.
So to pay this off in 19 years your payment would have to go up.


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## emmacollins7 (14 Jul 2010)

But by how much should I be paying it off? The bank told me that they were charging me interest on top of what that capital along with the interest I've already agreed to pay at the beginning of my agreement.


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## huskerdu (14 Jul 2010)

Maybe this will help explain it

Your original repayment mortgage agreement was that you paid back interest and capital every year. 

Assuming that it was close to the beginning of the mortgage, the figures would be something like this

I have made up the figures purely for illustration. 

Jan 2009 Outstanding amount on mortgage 220K
Monthly mortgage €1000. Of the €12000 you pay in the year, 9000 pays off the interest, and 3000 off the capital, so at the end of the year , the outstanding mortgage is 217K. The next year, you pay 12000, but the interest is only 8500,  so you pay 3500 off the capital, and so on for 30 years. 

Over the course of the year, 
In month 1, you are paying interest on 220,000
In month 2, you are paying interest on  2219250
In month 3, you are paying interest on 218500 etc

But, you have changed this to interest only, so you are paying interest on 220,000 for the whole year, so the interest will be higher.



You owe 220K, and this in not going down, so you pay interest on the whole amount of 220K, until you start paying off the capital again. 

For as long as you are not paying the capital, you are paying interest  on the whole capital.


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