How Is Your Mortgage Interest Calculated
Below is a MRR and PLR article in category Finance -> subcategory Wealth Building.
How Is Your Mortgage Interest Calculated?
Understanding how your mortgage interest is calculated can significantly impact the amount you pay over time. It's not always the same for everyone, as lenders use different methods to determine interest.
Interest-Only Mortgages
With an interest-only mortgage, your outstanding loan balance remains constant throughout the loan term. As a result, the interest you owe is predictable at the start of each year, provided interest rates remain unchanged.
Repayment Mortgages
In contrast, repayment mortgages?"also called capital and interest mortgages?"function differently. Part of your monthly payment reduces the principal loan amount. Consequently, your mortgage debt decreases yearly.
Traditionally, many lenders calculated interest annually, basing charges on the loan amount at the year's start without considering monthly payments made throughout the year. They would reassess the balance at the end of each year to determine the interest for the following year.
Daily Interest Calculation
In recent times, an increasing number of lenders have adopted daily interest calculations, which are more advantageous for borrowers. This method accounts for the reducing mortgage balance on a monthly basis.
Example:
Consider a repayment mortgage of £100,000 over 20 years at a 5% interest rate. Your monthly payment would be approximately £659.96, with around £250 allocated to the loan principal. After six months, you would have reduced your mortgage by roughly £1,500. With daily interest calculations, you don't pay interest on the original £100,000 but rather on the reduced balance of £98,500.
Choosing a Mortgage with Daily Interest
To ensure you benefit from daily interest calculations, use a mortgage search tool that filters for this feature. While it's essential to consider other elements to determine the true cost of the mortgage, selecting one with daily interest calculations can lead to significant savings.
Keep in mind that understanding these distinctions can help you make a more informed decision and potentially save you money in the long run.
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