Verifying interest calculated on a Mortgage

I have a tracker mortgage with NIB which I'm overpaying to get rid of it quicker.

The interest is added monthly which never seems to go down by much

Does anyone have a formula I can use to check that the interest is being calculated correctly.

Thanks

Try Karl Jeacle's mortgage calculator. Don't forget that in the early years of an annuity mortgage the repayments are mainly interest with a small bit of capital. As you chip away at the outstanding capital balance eventually this shifts to mostly capital and a small bit of interest. Karl's graphs illustrate this amortisation process.

I'm useless with figures but does this mean that if you paid off a chunk of your mortgage early, for instance with your SSIA money, that you would see quite a difference in the monthly payments, due to the interest?

Hi Burke

The interest should be fairly easy to verify in rough terms as it is calculated monthly.

If you owe €100,000
at an interest rate of 3%

the interest for the month should be 100,000 x .03 / 12 or around €250 per month.

If you make a significant capital repayment during the month, the arithmetic is a bit more complicated, but you could break it down into weekly calculations.

The repayment due is a much more complicated exercize. It depends on the amount outstanding, the period left in the loan and teh interest rate. You would need the calculator referred to by ClubMan to give you this.

Annr

Yes. When you repay a capital sum, you will have a choice of reducing your repayments while keeping the same term of the mortgage or maintaing the repayments and thus reducing the term.

Brendan

Yes - that's correct. Making accelerated regular (e.g. paying more than your initially agreed repayment) or lump sum capital repayments on a variable/tracker rate annuity loan can save significant costs in terms of interest. Basically you are reducing the amount outstanding quicker so the interest charges are less in the long term. It also reduces the effective term of the mortgage.

Post crossed with Brendan's.

Brendan said:

Annr

Yes. When you repay a capital sum, you will have a choice of reducing your repayments while keeping the same term of the mortgage or maintaing the repayments and thus reducing the term.

Click to expand...

Either way you save on interest charges compared to the situation in which you make no additional/accelerated lump sum capital repayment. The second scenario outlined above saves more than the first if I'm not mistaken?

Brendan said:

When you repay a capital sum, you will have a choice of reducing your repayments while keeping the same term of the mortgage or maintaing the repayments and thus reducing the term.

Click to expand...

ClubMan said:

Either way you save on interest charges compared to the situation in which you make no additional/accelerated lump sum capital repayment. The second scenario outlined above saves more than the first if I'm not mistaken?

Click to expand...

Yes, because in the first scenario [reduced repayments] the balance outstanding (minus lump sum repaid) remains higher for longer and thus requires more interest to be repaid than in the second scenario.

burkemg said:

Does anyone have a formula I can use to check that the interest is being calculated correctly.

Thanks

Click to expand...

My guess is that you already have this question answered and this is way more detail than you need but if anyone is interested in the formula I actually have it to hand because I'm working on some property investment software to allow various "what if" scenarios to be modeled.

The formula is tricky by hand but easy for the computer..

m = p x i / [ q x ( 1 - [1 + (i/q)]^(-n x q) ) ]

m = calculated monthly repayment
^ = to the power of
p = principal
i = interest rate
q = payments per year
n = number of years

once m is calculated you need to loop for each month and perform

h = p (i/q) this is the interest part of your monthly repayment
c = m - h this is the principal part of your payment
q = p - c this is the new principal, set p = q, loop back to calculate h

For example, Borrow 250,000 at 3.75% over 30 years
(numbers rounded to nearest euro for clarity)

p = 250000
i = 0.0375
q = 12
n = 30

I = interest componenet of monthly payment
P = principal component of monthly payment
RP = remaining principal

Monthly repayment = 1158

.......I...P...PR
Sep-05 781 377 249623
Oct-05 780 378 249246
Nov-05 779 379 248867
Dec-05 778 380 248487
Jan-06 777 381 248106
Feb-06 775 382 247723
Mar-06 774 384 247339
Apr-06 773 385 246955
May-06 772 386 246568
Jun-06 771 387 246181
Jul-06 769 388 245793
Aug-06 768 390 245403
Sep-06 767 391 245012
Oct-06 766 392 244620
Nov-06 764 393 244227
Dec-06 763 395 243832
Jan-07 762 396 243436
Feb-07 761 397 243039
Mar-07 759 398 242641
.. and so on

CoffeeBrew,

Is there a formula which is agreed/standard/legal for all mortgage lenders?

What if a few, say 5, instalments were missed. Would this change the Monthly Mortgage Instalment legaly?

Bizzy

Hi Bizzy

If you miss a repayment, you have a larger amount outstanding, and as interest is usually calculated daily, the amount of interest charged rises a little. I don't think that they generally immediately change the repayment due.

In general, the repayment stays the same but the missed payments are due as accumulated arrears.

The repayment is recalculated at particular events e.g. a payment of capital or a rescheduling of the mortgage or an interest rate change.

Occasionally, if you fall into heavy arrears, they "capitalize the arrears". In other words, they just recalculate a higher repayment, but wipe out the arrears. This does not reduce the balance outstanding though.

Brendan

Brendan,

A neighbour of mine showed me a series of letters he got in relation to his mortgage. He got into some difficulty with his payments. I noticed that he wasn't getting his tax relief so told him he should apply. When he was approved his mortgage was re-calculated and the monthly instalment went UP! He said this has happened to him before when interest rates went down his instalment went up!

It seems they are capitalising his arrears to arrive at a new instalment but WITHOUT 'wiping out the arrears'. How can they use this method? I thought lenders calculated instalments on the basis of payments being up to date - the arrears being arrears of those instalments. I estimate the instalments are 3-4 times what they should be.

I was wondering if there is legal formula as to how mortgage instalments are calculated and under what conditions they can be changed? Is there something in the legal mortgage documents which determines this?

Anyone else ever come accross this? Is it legal?

Bizzy

Good afternoon,
I have developed spreasheets to calculate interest / repayment amounts on mortgages and loans which I could send on to you if you like.