Are mortgage % repayments frontloaded?

D

Dinarius

Registered User
Messages
531
What I mean by this is, in the first few years, do you pay back mostly interest each month with little repaid off the amount borrowed, and then clear up the outstanding amount borrowed in the last few years?

Thanks.

D.
 
SBarrett said:
Yes, you have it spot on.
Click to expand...

Thanks for the prompt reply.

So, let's say the following happens.........

I borrow €100k, over 20 years, at 3%.

After 10 years I will have repaid X interest - whatever that figure is, it is more than I would have paid if both % and principal were repaid normally.

Now, what if after 10 years I decide to sell my house and repay the outstanding sum on the mortgage principal?

Am I credited with having paid more % than I might otherwise have when the reconciliation is done?

Thanks.

D.
 
I don't get you but you don't repay interest, you pay it. if you borrow 100k at 3%, your first payment will include 30 days of 100k @ 3% roughly 3k/12. The next payment will include 30 days of 100k less whatever capital you paid off.
 
Dinarius said:
Am I credited with having paid more % than I might otherwise have when the reconciliation is done?
Click to expand...
There is no reconciliation to be done - banks don't frontload interest to get ahead of repayments - they charge interest on whatever principal is outstanding at the time - it's just that it takes a long time for the principal to be paid down. You pay the same amount in year 1 as in year 19 - but you pay more interest in the early years because you owe the bank more money then. As you gradually repay the 100,000, the interest due reduces so that more of your unchanging payment can go to repay principal.

In your example, 100,000 at 3% over 20 years: (I looked at this as annual repayments to make this easier to explain - same applies with monthly payments)

Your annual repayment is about 6,722.

In year 1, 3% interest on 100,000 is 3,000. So you pay the 3,000 interest and the balance of your 6,722 (3,722) goes towards repaying principal. So at the end of the year, you owe 96,278.

In year 2, 3% interest on 96,278 is 2,789. So you pay the 2,888 interest and the balance of your 6,722 (3,833) goes towards repaying principal. So at the end of the year, you owe 92,445.

In year 3, 3% interest on 92,445 is 2,571. So you pay the 2,773 interest and the balance of your 6,722 (3,948) goes towards repaying principal. So at the end of the year, you owe 88,497.

etc. etc.

In year 10, 3% interest on 62,192 is 1,866. So you pay the 1,866 interest and the balance of your 6,722 (4,856) goes towards repaying principal. So at the end of the year, you owe 57,336

...
In the final year, 3% interest on 6,526 is 196. So you pay the 196 interest and the balance of your 6,722 (6,526) goes towards repaying principal. So at the end of the year, you owe 0



So you can see you are repaying more principal off each year because your interest bill is going down as you repay principal. But you have never paid more than you owe so there's no reconciliation if you repay after 10 years.

There are various mortgage calculators available online to look at how principal and interest are repaid.
 
elcato said:
I don't get you but you don't repay interest, you pay it. if you borrow 100k at 3%, your first payment will include 30 days of 100k @ 3% roughly 3k/12. The next payment will include 30 days of 100k less whatever capital you paid off.
Click to expand...

Thanks for the reply.

Let me put it another way.....

If I borrow €100k over 20 years will I, after 5 years, for example, have paid €25,000 off the principal? i.e. 1/4 of the term, so 1/4 of the principal.

Thanks.

D.
 

You were typing as I was........

That explains it perfectly.

Thanks.

D.
 
Dinarius said:
Let me put it another way.....

If I borrow €100k over 20 years will I, after 5 years, for example, have paid €25,000 off the principal? i.e. 1/4 of the term, so 1/4 of the principal.
Click to expand...
No.

At 3% over 20 years, principal repaid in the first 5 years is c. 20K, 2nd 5 years 23K, 3rd 26.5K and 4th 30.5K.

Have a look at Brendan's key post - explains how principal and interest are repaid.
 
You must log in or register to reply here.
Menu
Log in
Register