How Is Your Mortgage Interest Calculated

How Is Your Mortgage Interest Calculated



How is​ Your Mortgage Interest Calculated?
You might think this is​ a​ strange question and be of​ the​ opinion that it​ is​ calculated the​ same way as​ everyone else’s .​
Well the​ fact is​ that how your lender calculates the​ amount of​ interest that you​ owe can make a​ significant difference to​ how much interest you​ pay.
With Interest Only mortgages the​ amount of​ loan that is​ outstanding remains the​ same throughout your mortgage deal and therefore the​ amount of​ interest you​ pay is​ known at​ the​ beginning of​ each year,​ assuming interest rates don’t change.
However,​ this is​ not the​ case with repayment mortgages,​ also known as​ capital and interest mortgages .​
With this type of​ mortgage part of​ your monthly payment is​ used to​ reduce the​ amount of​ your loan outstanding .​
This means at​ the​ end of​ each year you​ will have less mortgage debt than at​ the​ start of​ the​ year .​
a​ number of​ years ago most lenders calculated interest annually .​
This meant that at​ the​ start of​ each year they looked at​ the​ amount of​ mortgage that you​ owed and based the​ interest that you​ would pay in​ the​ following year on​ that amount .​
They took no account of​ the​ amount of​ your mortgage that you​ paid off monthly during that year .​
At the​ end of​ the​ year they would look at​ the​ reduced amount of​ mortgage that you​ now had and start the​ process again.
In recent years a​ significant number of​ lenders have moved to​ calculating interest daily .​
This is​ more beneficial to​ the​ borrower because the​ amount of​ interest you​ pay takes account of​ the​ fact that your mortgage balance is​ reducing each month.
Let’s take a​ simple example of​ a​ repayment mortgage of​ £100,​000 being repaid over 20 years with an​ interest rate of​ 5% .​
The monthly payment would be £659.96 .​
Of this approximately £250 is​ for repayment of​ the​ loan .​
So after six months you​ would have paid roughly £1500 of​ your £100,​000 mortgage back .​
So why should you​ have to​ pay interest for the​ second six months on​ a​ loan of​ £100,​000 when your mortgage is​ now only £98,​500? Well you​ don’t have to​ .​
If you​ take out a​ mortgage with a​ lender who calculates interest daily you​ will only ever pay interest on​ the​ actual amount of​ loan that you​ have outstanding.
The best way to​ make sure you​ get a​ mortgage with interest calculated daily is​ to​ use a​ mortgage search engine that allows you​ to​ look only at​ mortgages that have this feature .​
It’s not the​ only thing you​ should take account of​ – ultimately the​ true cost of​ the​ mortgage over the​ mortgage deal is​ what matters – but its worth looking out for.




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