Are interest payments front-loaded on a mortgage?

D

Dinarius

Registered User
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Ten years ago, we borrowed €300k from AIB to be repaid over 20 years.

This was part house mortgage (where we live) and part buy-to-let (apartment). We were advised that, for tax reasons on the rental income of the apartment, we should have part of the mortgage set against the apartment. The split was roughly €200k/€100k. The mortgages are SVR.

With 10 years gone, there is approximately €195k outstanding to be paid in the remaining 10 years.

Am I right in thinking that interest payments are front loaded on a mortgage?

I'm asking this because, with 10 years to run, we don't owe AIB €150k (half of what we borrowed, after half the term) we owe them €195k.

If this is the case, then, if I was to switch, I would have to borrow €195k from the new lender to close the AIB mortgage. Correct?

If so, doesn't front loading of interest create a bind between the lender and the borrower that creates a disincentive to move?

Thanks. (Hoping I've got this one totally wrong! :))

D.
 
Dinarius said:
This was part house mortgage (where we live) and part buy-to-let (apartment). We were advised that, for tax reasons on the rental income of the apartment, we should have part of the mortgage set against the apartment. The split was roughly €200k/€100k. The mortgages are SVR.
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This is very messy. Is it one mortgage ? Was 100K used to fund the apartment?

To answer your question, no the interest is not front loaded, when you take out your mortgage most of the repayments are interest and very little is capital. Over time as you work away at the capital the amount owing reduces, so naturally the amount of interest you pay is reducing.

If you switch now, you borrow 195K from a new bank. Which is the amount you currently owe. Who are you thinking of switching to? KBC have a good rate and are offering switchers a cash incentive for the legal costs.
 
Just to illustrate what Bronte is saying. €300,000 @6% over 20 years will turn out as follows:

http://www.calculator.net/amortizat...oanterm=20&cinterestrate=6&printit=0&x=64&y=7

upload_2015-2-24_9-1-1.png
 
Dinarius said:
I'm asking this because, with 10 years to run, we don't owe AIB €150k (half of what we borrowed, after half the term) we owe them €195k.
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I dont think you understand how long term longs work.

You take out a loan over 20 year and you repay the interest and capital at different rates.

So in year 1 you pay the interest on €300,000 at 4.5% which is €13,500 odd and an element of the capital.
The annual payments on a 20 year €300,000 loan at 4.5% are €22,776 which is approx €13,500 interest and €9,276 capital

In year 20 you pay very little interest (as you owe the bank very little) and a large amount of capital. About €1,000 in interest and €21,776 in capital.
 
Yes amortisation is what I should have said, and banks here always give you an amortisation table, but in the past I didn't receive one from Irish banks. I think it's the law here. It is a very helpful way to explain to people how a mortgage works. (and it should be taught in schools in my opinion)

And I have to admit that I love looking at amortisation tables and ticking off the years ! I looked at one yesterday on a mortgage I fixed last year, there's nothing like eventually seeing the interest going down and the capital payments really knocking off the amount owing.
 
Hi Bronte,

Thanks for the very prompt reply.

So, why is it that we owe €195k after half the term and not €150k? (Sincerest apologies for being thick!)

The breakdown in the mortgages is €130k (house), €65k (apartment).

Regarding switching to KBC, AIB are offering a rate of 3.85% over 20 years, when LTV is <=50%. We would be way below 50% on both loans. But, I don't think we're on that 3.85% rate. The rates can be viewed here> (they're not easy to find - typical AIB) http://personal.aib.ie/our-products/mortgages/mortgage-interest-rates

Our current total monthly repayment is €1850.

D.

Ps. I'm waiting for a call-back from AIB. There should be a law against 1890 numbers. On principle, I never phone them. But, if you call AIB's main number, there is no menu option for existing mortgage. So, I called customer service (joke) and set up a call-back.
 
Ok. So, another way of looking at it is: If you pay X every year, then it stands to reason that, the % bit of X is bigger in the early years (because at that point you owe more) and therefore less is taken from the outstanding capital. Which is why, after 10 years, you haven't paid off 50% of the loan. Correct?

Forget a chunk of my last post. I was replying while you were!

Thanks.

D.
 
How much did you pay for the apartment? Was 100K mortgage used for this purpose. The reason I'm asking is to clarify that you are all legit re the rental and revenue.

How much is each property worth?

And I've no intention at looking at AIB rates (LOL), you tell us what your interest rate is - look up the last letter you got from them, you'd have some documentation anyway for the rental tax returns wouldn't you.
 
Hi Bronte,

Just to be clear - everything(!) is legit.My accountant does the apartment tax with mine - I'm self-employed.

We used to live in the apartment. When we moved to the house, we were told that we should leave the mortgage we had on it for tax reasons. i.e. rental income.

I've just realized that we are paying the same % rate on both loans. Not sure why. But, obviously, it's not a buy-to-let rate on the smaller mortgage.

Also, AIB have just told me on the phone that, if you've had an LTV rate previously, you cannot avail of it again on any mortgage. This sounds to me like BS of the highest order.

D.
 
Hi Dinarius,
the piece of the puzzle you are missing is that you pay the same amount back every month of the mortgage. It is the portion of this amount that changes between interest and capital. Another way of looking at it is if your bank said that you would pay the capital in equal parts over the life of the loan, so that you owed half of the capital after half the time, you would pay very large monthly repayments at the start of the loan. For example in your first monthly payment you would be paying capital of 1,250 (300k / 20/12) plus interest on 300k (the outstanding loan). The last payment of the loan, after 20 years would be 1,250 plus a couple of cent in interest.
But banks dont do this. They calculate the capital amount plus all the interest over the life of the loan and divide it by the number of payments to give an equal payment every month.

Hope I havent confused the issue further.
 
Hi Buddyboy,

Not at all. I've got it now.

Am just left wondering why I can't avail of LTV a second time. :rolleyes:

Thanks.

D.
 
Buddyboy said:
the piece of the puzzle you are missing is that you pay the same amount back every month of the mortgage. It is the portion of this amount that changes between interest and capital. Another way of looking at it is if your bank said that you would pay the capital in equal parts over the life of the loan, so that you owed half of the capital after half the time, you would pay very large monthly repayments at the start of the loan.
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Buddyboy

That is a brilliant explanation. I will incorporate it into my guide to mortgage calculations.

Brendan
 
Dinarius said:
Am just left wondering why I can't avail of LTV a second time. :rolleyes:
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AIB allows customers on SVRs to switch to an LTV rate.
They don't allow customers on 90% LTV to switch to a 50% LtV rate.

EBS don't allow either.

Presumably to protect their profits?

Brendan
 
Dinarius said:
Ten years ago, we borrowed €300k from AIB to be repaid over 20 years.

This was part house mortgage (where we live) and part buy-to-let (apartment). We were advised that, for tax reasons on the rental income of the apartment, we should have part of the mortgage set against the apartment. The split was roughly €200k/€100k. The mortgages are SVR.
Click to expand...

Let's be absolutely clear here so that you don't end up with a massive tax bill and penalties.

If you borrowed money to buy a house which you subsequently let, it's ok to claim tax relief on that interest.

If you borrowed money to buy your home, which is secured on a buy to let, then you cannot claim tax relief.

Brendan
 
Brendan Burgess said:
AIB allows customers on SVRs to switch to an LTV rate.
They don't allow customers on 90% LTV to switch to a 50% LtV rate.

EBS don't allow either.

Presumably to protect their profits?

Brendan
Click to expand...



Brendan,

I'm confused.

The AIB guy told me that, if you've had the benefit of an LTV rate before, you can't have it a second time.

The mortgage on our house would be no more than 20% of its value.

As of December 1 2014, we are on their SVR 4.15% rate, a rate which is (curiously) listed here as being "discontinued". http://personal.aib.ie/our-products/mortgages/mortgage-interest-rates (Click on Owner Occupier Rates Over 20 Years).

1. Why are we on a rate that is discontinued?

2. If we're not on any LTV rate, why can't we move to the 3.85% one?

Thanks.

D.
 
Brendan Burgess said:
Let's be absolutely clear here so that you don't end up with a massive tax bill and penalties.

If you borrowed money to buy a house which you subsequently let, it's ok to claim tax relief on that interest.

If you borrowed money to buy your home, which is secured on a buy to let, then you cannot claim tax relief.

Brendan
Click to expand...

Yes, we borrowed money to buy an apartment (and lived in it for a while) which we subsequently let.

No, our house is not secured on the apartment. It never has been.

But, many thanks for asking. ;)

D.
 
Brendan Burgess said:
Hi Dinarius

AIB makes the rules not I. They don't allow it. End of story.

UB is the only lender which officially allows it.

Brendan
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Of course.

But, I still don't understand your answer. Sorry. :(

We're currently not on *any* LTV rate. We're on an SVR rate that is "discontinued". So, we're not asking to switch from one LTV to another - just to be put on one from the "discontinued" SVR.

What's more, the property is worth multiples of the mortgage.

Yours, confused!

Thanks.

D.
 
Dinarius said:
We used to live in the apartment. When we moved to the house, we were told that we should leave the mortgage we had on it for tax reasons. i.e. rental income.
Click to expand...

Now you've totally lost me.

When did you buy the apartment, when did you buy the house. How did you fund each purchase.

(I understand the tax advantage of leaving a mortgage on that apartment that you subsequently let)
 
Bronte said:
Now you've totally lost me.

When did you buy the apartment, when did you buy the house. How did you fund each purchase.

(I understand the tax advantage of leaving a mortgage on that apartment that you subsequently let)
Click to expand...

How have I lost you?

The house purchase was funded partly through the sale of a third (commercial) property, on which I paid an obscene amount of CGT.

Thanks.

D.
 
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