Someon told me that in a repayment mortgage you pay the interest first then the capital. I am not sure about this. I thought you pay the interest with the mortgage. Also if I increase my monthly payment will I benefit on a repayment and pay less interest.
2006-10-22 11:43:19 · 7 answers · asked by prabo 1 in Business & Finance ➔ Other - Business & Finance
The idea is that every month you pay enough to at least cover the interest, and a little bit over that to start reducing the capital.
As time goes on, the capital goes down, so the amount of interest goes down, so more of what you pay goes into paying off capital, and things get better and better in a "virtuous circle", until in the last month you pay off your last £500 (or whatever) of capital, and your house is your own at last!
This means that increasing your payments really helps (so long as your lender is happy for you to do this - it's not possible on all mortgages). To see why, assume that your first month's payment is 70% paying off interest and 30% capital. If you increase your payment by only 10%, then it's paying off 33% more capital, so the reduction of your interest for the next month is also that much greater - every month thereafter you are paying off more capital and reducing the amount of interest further.
I've just worked out a (simplified) example of a 25 year mortgage of £100,000. Initial payments were £591 per month, and the total amount repaid was £184,500. By increasing the payment to £650 (10% more), the mortgage was paid off in 21 years and the total repayment was £171,200: over £13,000 - one-sixth - of the interest had been saved.
But remember it's a false economy to pay off extra mortgage if you're still running higher-interest debt like credit cards.
2006-10-22 21:26:44 · answer #1 · answered by gvih2g2 5 · 0⤊ 0⤋
With a repayment mortgage, you pay part of the loan and part of the interest, in the first 6-7 years you are paying mostly interest, however, as you are also paying of some of the loan over the years the interest payment reduces and the amount of loan payment increases, if you can pay of more than the basic mortgage payment per month you can make HUGE savings on what you owe, check with your mortgage supplier if interest is added daily or annually, if it is annual, a lump-sum payment by you just before it is calculated will also save you money.
2006-10-22 13:09:35 · answer #2 · answered by MICHAEL B 2 · 0⤊ 0⤋
You actually pay both at the same time.
To start with, as the capital is much greater, the larger proportion of what you pay is interest. As you pay off more of the capital, you pay less interest, as the interest is calculated against the remaining capital. If you pay off more each month than you need to, the extra payment generally goes against the capital, meaning that in the long term you will pay less interest. This means that if you keep the payments at the same level, the mortgage will be paid off earlier, saving you heaps of cash!
Hope this makes sense.
2006-10-22 11:53:57 · answer #3 · answered by Nick E 2 · 0⤊ 0⤋
Yes, after so many years, the payment goes more toward the principal. If you are not carrying it out for the full 30 yrs, then it should be calculated on the unpaid bal. If you pay extra, you must tell them in writing that this money is going toward the principal. There is no pre-payment penalty any more,so you are ok there. You can request a pay off bal. for paying off right now, and they will give it to you. In essence you are paying interest for the previous 30 days, being that they can only charge you interest for days already used, but the principal is for the month ahead. So if you were to pay off now, they could only charge you for time spent in the house, as far ast he interest.
2006-10-22 12:39:31 · answer #4 · answered by shardf 5 · 0⤊ 0⤋
This is true. The interest is the money earned by the bank. At the beginning of your loan, you pay mostly interest, then after a number of years your payment goes more towards principle. And yes, you could pay off your loan and pay less interest by paying extra each month. Make sure you specifically designate the extra towards principle.
2006-10-22 12:20:11 · answer #5 · answered by Alterfemego 7 · 0⤊ 0⤋
Standard---you pay mostly interest & some capital, even-ing out as you go, til most is capital.
If you pay MORE than the agreed payment, the EXTRA is applied to the principal---and you will end up paying much less in interest over time.
2006-10-22 11:54:05 · answer #6 · answered by Anonymous · 0⤊ 0⤋
you pay interest for the first few years at least
2006-10-22 11:55:45 · answer #7 · answered by smiley 4 · 0⤊ 0⤋