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Mortgage Maths



All examples are based on an initial loan value of 200,000 (the maths is independent of currency).


The remaining value of a loan throughout its life for three different monthly repayments. Interest rate is 6.5%.

Remaining value versus time.




The relationship between term duration and repayment amount. Small increases in repayment can reduce term length by a lot.

Term duration versus repayment amount.




Total interest paid at end of mortgage life (on top of the 200k loan amount itself), versus term length. Plots shown for interest rates of 6.5, 10 and 15%. On a standard 25(UK)-30(US) year mortgage you're probably paying back at least the loan amount again in interest.

Total interest payments versus term duration.




Mortgaging to the extremes of your ability to repay means that:
  1. You're signing a lot more of your earned wealth over to the bank than if you took on a more manageable loan. Interest rates matter but are ultimately unknowable for the full life of a 25-30 year mortgage.
  2. You're closer to the point of loan default in the event of a drop in earnings and/or a rise in interest rates.

Above all, don't trust advice from a bank, generally speaking they are not acting in your best interests but those of their shareholders. If you need outside advice then use an indepedent adviser that's not earning commission from each sale.


Colin,
(some time in 2009)




Derivation:
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Mortgage maths derivation page 1



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Mortgage maths derivation page 2

Copyright 2009, 2010, 2011 Colin Green.
This article is licensed under a Creative Commons Attribution 3.0 License