Front Loaded Interest & Mortgage Switching

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Kate10

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THis is probably a very stupid question, so apologies in advance!

My husband and I have a large mortgage and we had a fixed rate of 3.4% for the last three years, finished in October. We are looking around for a new mortgage and we think we will take a 3 year fixed term with AIB at about 5.36%.

We are not concerned about legal fees for the switch.

My question is this - as interest is front loaded by the banks, so that we are paying more interest at the beginning of the mortgage term, does switching our mortgage regularly cost us more in the long term?

Maybe I've mis-understood what front-loading means?

Would really appreciate any advice.

Thanks.

kate,
 
No.

If you are switching to lower interest rates it will make it cheaper. (ignoring switching costs).

Just to be clearer. Interest isn't "front loaded". It is charged on the pcinciple outstanding. At the start you owe a lot, so you pay more interest.

So if you switch to a lower interest rate (and keep the same monthly repayment), you will be paying less interest each month, and hence more off the principle, which in turn means you will be paying less interest (because the principle is now lower than it would have been), etc etc etc.
 
To illustrate what Camry is explaining above try Karl Jeacle's mortgage calculator and look at the amortization graph to see how repayments are split between increasing amounts of capital and decreasing amounts of interest over the lifetime of the mortgage. Obviously for the interest only mortgage this does not apply since you are just paying interest (on the full capital amount) and the capital outstanding is not reducing over time.
 
The main thing to remember - is that if your original mortgage was taken out over say 25 years and after 3 years you switch - the new one should be taken out over 22 years (or less).
Can I ask you what is your current lender offering you that is making you switch to a rate of 5.36?
 
Hi Irishlinks,

We are currently on a fixed rate of 3.4% until October. Our lender is ICS. They have not told us what rate we will be offered at that point. They say that we will be offered a number of rates to choose from. I know that the current ICS rates for anything but new business are very poor though, so that is putting me off staying with them.

Kate.
 
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