Mortgage interest calculation

[burmo]

Hi,

I am wondering if the mortgage interest calculations are calculated on a reducing balance or are there different methodologies with different types of mortgages?

If you can point me to any references that would be great.

Thanks,
Burmo.

 

[roberts]

Hello Burmo,

You are correct mortgage interest is charged on a reducing balance.

e.g. € 100,000.00 outstanding, interest rate is 3%, the interest charge for the following month is calculated as follows 100000 @ 3% divide by 12 = € 250 and say your total repayment is € 600 then € 350 will be deducted from the capital so the following months interest will be as follows.

100000-350 @ 3% divide by 12 = € 249.12 and your capital repayment will be € 600 - € 249.12 = € 350.88 and so on.

Look at amortaziation tables online.

 

[burmo]

Thank you Roberts. So the interest is recalculated after every capital payment?

 

[roberts]

Yes. Likewise (hopefully this does not happen) if you miss a repayment the interest is added to the capital. Take my first example the capital increases to 100250 and the following interest repayment will be 100250 @ 3% = € 250.63. You can see how failure to keep up repayments can result in the mortgage snowballing out of control.

Hope this helps.