Mortgage interest calculation

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.

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.

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

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.