How is mortgage interest calculated?

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BigPineapple

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I have a question about how mortgage interest is calculated and whether there is a mistake or not. It doesn't tally up for me. I'm hoping someone can confirm whether my understanding is correct.

I switched to AIB back on 11 December 2020. The amount is 50k fixed at 2.35% for 3 years (total term of mortgage is 28 years). There was an interest charge of 12.87 on 16th December. I thought grand, it must be interested for the period between drawdown and first monthly repayment. I didn't think too much about it.

Monthly repayment is 203.17 thereafter for January, February and March all occuring on the 11th of each month. Then came a charge on the 16th March for 288.50 for interest which I was not expecting.

I did a bit of search on the AIB website to try and understand and it turns out AIB charge interest in arears every quarter. So it seems that this charge is interest for January, February and March 2020.

What I'm confused about is where that charge is coming from or how AIB work it out. I plugged in those info into mortgage calculator (I used CCPC and Karl's Mortgage Calculator to cross check). It showed monthly repayment is 203.24, consisting of approximately 105 principal and 97 interest (which will naturally change over time as interest will reduce and principal will increase. But effectively same monthly repayment spread over 28 years). It pretty much matches the monthly repayment I'm making. So far so good.

This is what i don't get, if my monthly repayment is already inclusive of interest portion as part of the repayment. Then why am I being charged again at quarterly interval? (Looking at the interest charged, 288.50/3 = approximately 96.20, so this figure does closely match my expected monthly breakdown from the calculator).

I guess the question is, am I being overcharged? Or am I missing a trick or something?

I have rang yesterday and the guy couldn't answer it when I asked so he suggested to ask for a breakdown to be sent out to me (won't get it in the post until next week at least. Won't even know if the breakdown will show how that is calculated or just a monthly repayment amount).

Can anyone help explain?
 
BigPineapple said:
I guess the question is, am I being overcharged?
Click to expand...
No.
Every monthly repayment is credited entirely to capital, reducing your balance outstanding. Then once every 3 months they charge you interest, which adds back to your capital balance.
It should make sense if you look at the transactions in the account.
 
The interest charge is added to your balance.

Your repayment reduces the balance.

It's the same on all mortgages.

What may differ between banks is the frequency of adding the accruing interest. Some banks add interest monthly, some quarterly, etc.
 
BigPineapple said:
This is what i don't get, if my monthly repayment is already inclusive of interest portion as part of the repayment. Then why am I being charged again at quarterly interval? (Looking at the interest charged, 288.50/3 = approximately 96.20, so this figure does closely match my expected monthly breakdown from the calculator).
Click to expand...

Look at this sentence again, and think about it.

Interest has to be charged to you, before you can pay it.

Interest must be added to your balance.

The bank charge you €x interest.

You then repay €y per month, where y > x.

Some of your €y repayment is to pay the interest, yes.

It's like you take one step back, as the bank add interest.

Then as you make a repayment, you take two steps forward.
 
This might help

Key Post - A guide to mortgage repayment calculations

As always, comments, corrections and suggestions for layout very welcome - Brendan There have been a few questions on askaboutmoney which have been very difficult to answer without explaining the background to mortgage calculations. For example: Bank of Scotland offer to write off my...
www.askaboutmoney.com

I have edited the title of your thread to avoid misleading people.

Brendan
 
Thanks everyone. Yes I think I see it now where I went wrong.

The 203.17 is reducing the full balance of which there is no interest component in it. Effectively reducing the balance by the full repayment. Come every quarter, that interest is added back on since it was not charged.

I had thought the monthly payment is split into two components (namely principal and interest). It just a different way compare to what I have it other bank before.

Thanks again for explaining.
 
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