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Math Help - how do bank work out your mortgage repayment

  1. #1
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    how do bank work out your mortgage repayment

    Hi,

    Loan amount 117k
    I recently took buy to let mortgage with UK bank northern rock for 25 years with first two years fixed at 5.49%. They are charging me around 530 interest only every month. Does anyone how did they come up with this value? i.e forumula used?

    i can make 10% overpayment per year without paying any early repayment charges. What will be my monthly interest only payment if i decide to make 10% within 1 month of mortgage start date.

    Many Thanks
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  2. #2
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    Re: how do bank work out your mortgage repayment

    Rest assured that you can rely on a bank to design repayment plans so as to maximize THEIR interest income. It is not always obvious, apparent, or even well-motivated exactly how these things are calculated - particularly for an Adjustable Rate Mortgage. This is the reason why most loan statements have a very similar note: "The value shown on this statement is NOT the payoff value of this loan. You must call our home office for a payoff value." To make it worse, the home office doesn't always know, either. Point in fact, my son just paid off his car loan. He called for a payoff amount. He paid the amount they said. He then received a refund of $3.42 in the mail. They were close!

    You must then get used to the fact that nothing is linear. The fact that you said "around 530" indicates you are aware of this.

    I have found that the best way to keep up with the bank is to keep a running account value and simply adjust my calculation every time I get a statement. Often I hit it right on, but also often I adjust a few quid - or maybe only a halfpenny. A spreadsheet is a wonderful tool for this sort of thing.

    For 117,000, paying monthly FIXED interest of 5.49% APR for 25 years, one might conclude 717.79 a reasonable payment. This, however may not include a few other loads and charges that may be attached. Likewise, 117000*(0.0549/12) = 535.28 may appear to be the interest charged in the first month. Still, this may assume things that are not the case, such as accelerating interest charges to make sure they collect more.

    So, good luck with that. Totally fire up a spreadsheet, but don't expect to get it right at every turn. :-)
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  3. #3
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    Re: how do bank work out your mortgage repayment

    Quote Originally Posted by charikaar View Post
    Loan amount 117k
    I recently took buy to let mortgage with UK bank northern rock for 25 years with first two years fixed at 5.49%. They are charging me around 530 interest only every month. Does anyone how did they come up with this value? i.e forumula used?

    i can make 10% overpayment per year without paying any early repayment charges. What will be my monthly interest only payment if i decide to make 10% within 1 month of mortgage start date.
    Code:
     DATE     PAYMENT  INTEREST     BALANCE
    Dec.31                         117,000.00
    Jan.31    -545.54   545.54*    117,000.00 (31 days on 117,000.00)
    Feb.28    -492.74   492.74     117,000.00 (28 days on 117,000.00)
    Mar.17 -11,700.00  (299.16)    105,300.00 (17 days on 117,000,00)
    Mar.31    -520.90  (221.74)    105,300.00 (14 days on 105,300.00)
    Apr.30    -475.14   475.14     105,300.00 (30 days on 105,300.00)
    ...and so on...
    * calculation example: 117000 * .0549/365 * 31 = 545.54

    I'd "keep track" of it as shown, assuming "daily balance" calculations.
    Then, IF they took more than above calculations, I'd simply ask WHY?

    NOTE: assuming the 10% overpayment DURING month adds FUN:
    like, how will they handle the interest payment calculation...?
    What I show above is SIMPLE (cheapest) interest (no compounding).
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