technical question on arrears

[rodger]

Theoretical question on arrears:

This just shows how little I know about mortgages:
Are capital repayments added to arrears?
If on a loan of €X there is a €100 interest due and €100 capital due each month.

Then if I miss a payment: does the loan become X + €100 ? or X + €200

Thanks.

 

[Brendan Burgess]

Have a read of this as background reading:

Brendan Burgess' guide to Mortgage Repayment Calculations

Case 1
To make it simple, assume 1% interest a month on an interest roll up loan i.e. they don't require any repayments

Balance 1 January: €100,000
Balance 1 February : €101,000 ( €100k +1%)
Balance 1 March : €102,010 (101,000 +1%)
Balance 31 March: €103,030 (101,000 +1%)

You were not due to make any repayment,so there are no arrears.

Case 2
Now assume you make €2,000 a month repayments
Balance 1 January: €100,000
Balance 1 February : €99,000 ( €100k +1% -€2,000)
Balance 1 March : €97,990 (99,000 +1% -€2,000)
Balance 31 March: €96,970 (97,990,000 +1% -€2,000)

Case 3 - You are supposed to pay €2,000 a month, but don't pay anything

Because you paid nothing, your mortgage balance will be the same as Case 1 i.e. €103,030

However, your arrears balance will be €6,000 the sum of the missed payments.

If you now pay off the €6,000, the balance will fall to €97,030

 

[Brendan Burgess]

Are capital repayments added to arrears?

Your arrears total is the sum of payments missed, so the answer to your question is yes. But the arrears figure is only a memorandum item.

If on a loan of €X there is a €100 interest due and €100 capital due each month.

Then if I miss a payment: does the loan become X + €100 ? or X + €200

The loan becomes : x + €100

 

[rodger]

Cheers Thanks Brendan