Capital/Interest mix in payments

[Unregistered]

I'm thinking on taking on a 15 year mortgage and am wondering if the payments over the first 5-6 years are still primarily weighted in favour of clearing the interest. I mean there's no point in me running in with my SSIA cheque in 2007 in thr hope of reducing the capital if all they do with it is throw it into thr interest pot. Any ideas?

 

[ClubMan]

Plug the relevant details into Karl Jeacle's mortgage calculator and you will get a good idea of how the repayments are split between capital and interest over the years. Regardless of the way that normal repayments are split between capital and interest if you make a lump sum repayment and make it clear that you want this to be used as a capital repayment then it will immediately reduce the capital (and consequently the interest charged thereafter). In this case the lump sum will not be split between capital and interest but will immediately reduce the outstanding capital balance by the lump sum about. Does that make sense to you?

 

[Unregistered]

Yes thanks. I'll have a look at the link in your posting

 

[WizardDr]

You actually pay the interest as you go I think.
If you are up to date, and feel that putting the ole SSIA in it will reduce capital.
It effectively saves you interest at whatever the rate is. There is an opportunity cost if you have alternative investments that you dont go for.

 

[ClubMan]

You actually pay the interest as you go I think.

Yes - Karl Jeacle's calculator makes it clear how at the start of the mortgage repayments are going mostly on interest and a little on capital (e.g. at the end of the first year people generally still owe almost the full amount borrowed). As the years go by the capital is chipped away and consequently the interest charges reduce. After a while the amount going on interest reduces and the amount going on capital increases. Nearing the end of the mortgage repayments are mostly capital and reducing amounts on interest. Until the mortgage is cleared. Making a lump sum or regular increased repayments along the way will immediately reduce the capital outstanding (but make it clear to the lender that this is the intention so that they don't hold it in reserve or something like that!) and is a good way to reduce your debt and your overall interest costs (assuming that you don't need the money for something else or will clear the mortgage only to borrow at higher rates soon after of course). Current account/offset mortgages work on the same principle while leaving the money offset against capital available for access and not locking it into equity in the property.