What is meant by cost of credit.

Just looking at letter of offer belonging to one of my family and wondering what is meant by cost of credit? Your told amount of each instalment, next line amount repayable and next line says "cost of this credit (6 minus 1) and a figure is given of 7,500 euros more than the actual amount borrowed. What does this mean please?

Total interest repayments

It's a meaningless figure which totally ignores the time value of money.

It is the total repayments, less the amount borrowed.

Or, looking at it a different way, it is the total interest paid.

But it treats one euro paid today as being the same as one euro paid in 20 years.

Brendan

"Cost of credit
The cost of credit shows you the real cost of borrowing. It is the difference between the amount you borrow and the total you will repay including the interest by the end of the loan period." from www dot itsyourmoneydot ie/jargonbuster

Have a look at www dot drcalculator dot com/mortgage/ and put in the amount you are borrowing over time and look at the total interest you are paying. Not how reducing the term/ overpayments/ lump payments significantly reduce the overall "cost of credit"

Good luck.

Thanks for that so it can be ignored really is what your saying. One other question on similar matter. My son almost 2 years into 35 yr mortgage wants to come back to 30 years. Does the 30 years start from now so as he has 28 years payments left?

If he's reducing the term by overpaying his mortgage, he can reduce it by any amount he wants, so he can reduce it by 3 years and bring it back to 30 years from now or he can reduce it by 5 years so that it's 30 years from original date. The latter is better for him but his monthly repayments will be higher.

Thanks for that and just wondering which is the best or does it balance out much the same either to reduce his term maybe even to 25 years or to just pay about 200 a month extra on his mortgage as it stands and what would be the saving at the end of the day.

Assuming an outstanding amount of 300k and a fixed rate of 3.5% (for arguments sake)

Reducing the term to 25 years gives monthly payments of: 1,501.87

Whereas overpaying by 200 a month (original monthly payment: 1,347.13) gives new monthly payments of: 1,547.13 which will reduce the overall term by 6 years and 1 month (23 yrs 11 months).

From a total interest paid point of view, option 1) reduce the term to 25 years has total interest paid of: 150,561.29 whereas option 2 has total interest paid at: 142, 879.41

Play around with your figures in something like: www dot drcalculator dot com/mortgage/

Bear in mind comment above re: time value of money - you might be happier you saved EUR40 a month now (by paying for longer) when a can of coke might cost you EUR50 in 20 years time.

Salvidor the amount is not that high its around 164,000 on a good tracker of about 1.7% . Checking on one of the calculators if 200 per month extra was paid in it would seem to bring it down to 23 years if thats correct which sounds great. Bank clerk seemed not too enthusiastic about shortening the term to 25 but was pushing more for leaving it at 35 and paying in the extra per month.

I would tend to leave the term as is and overpay. You never know when your son will need flexibility on payments and reducing the term increases the payments, thus reducing flexibility.

Ash 22 said:

Salvidor the amount is not that high its around 164,000 on a good tracker of about 1.7% . Checking on one of the calculators if 200 per month extra was paid in it would seem to bring it down to 23 years if thats correct which sounds great. Bank clerk seemed not too enthusiastic about shortening the term to 25 but was pushing more for leaving it at 35 and paying in the extra per month.

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As I understand it he does not renegotiate the term with the bank, he just overpays each month. If he's on a tracker with a rate like that he doesn't want to go mucking around with the loan terms. It sounds like the teller may have actually been looking after his interests.

WaterSprite said:

I would tend to leave the term as is and overpay. You never know when your son will need flexibility on payments and reducing the term increases the payments, thus reducing flexibility.

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+1
At the end of the day both options have the same effect and keeping flexibility is always a good thing.

Thanks a mil for ye're opinions and will go with them. I can see the difficulty if interest rates rise and if any more pay cuts come which would make things harder ok.