What Does A Mortgage Broker Think
Ella says the aim of the game is to pay down your debt on your owner-occupier. So, if you have one, make that your focus.
Investors utilise interest-only loans to increase cashflow, which can be spent to invest elsewhere.
But while you arent paying down debt, at least not immediately, the investor is relying on the premise the property is going to increase in capital gain. This historically has always been true over the long term.
What Is The Right Choice For Me?
How Is My Interest Payment Calculated
Lenders multiply your outstanding balance by your annual interest rate, but divide by 12 because youre making monthly payments. So if you owe $300,000 on your mortgage and your rate is 4%, youll initially owe $1,000 in interest per month . The rest of your mortgage payment is applied to your principal.
Amortizing Monthly Payments Formula
When the amortizing monthly payments are found, it is possible to calculate the total cost of the loan by simply adding up all monthly payments. In the case of interest-only loans, the total cost can be calculated by multiplying monthly only-interest payments by the number of months in the only-interest term, multiplying monthly amortizing payments by the number of months in the amortizing term, and adding them up.
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How Much Can You Afford To Borrow
Lenders generally prefer borrowers that offer a significant deposit. They typically request at least 5% deposit based on the value of the property. If a house is valued at £180,000, a lender would expect a £9,000 deposit. In this example, the lender would be willing to offer a loan amount of £171,000. Meanwhile, some lenders may offer first-time buyers a 100% mortgage with a £0 deposit. However, obtaining this sort of deal usually forces a borrower to pay a much higher interest rate on their loan. This is usually one percent higher than a mortgage that requires a deposit. Consider this expensive trade-off before choosing a zero-deposit deal.
If you know the interest rate youll be charged on a loan, you can easily use the above calculator to estimate how much home you can afford. For example, at 2.29% APR on a £180,000 home loan, it will require £788.61 of full repayment per month, or £343.50 per month with an interest-only payment. If your maximum monthly budget for a home payment is £1,000 per month, you would then divide this amount by the above payments to get the equivalent loan capital. The example is shown in the table below.
|£551,596 £524,016 = £27,580||£240,272 £228,258 = £12,014|
If you had £200 in other monthly home ownership related fees, then this might take a renter equivalent of £1,000 down to £800.
Who Should Consider Interest Only Mortgages
There are specific types of borrowers that should considerthis type of mortgage. If the buyer desires to afford more home now or knowsthat the home will need to be sold in a short period of time, this is the kindof loan to go with.
Or maybe the buyer wants the initial payment to be lower andis confident that the large payment increase in the future is something theycan handle. Lastly, a borrower looking at an interest-only mortgage will beconfident that they can get a higher rate of return investing the moneyelsewhere.
So, it is safe to say that someone new to the housing marketor looking to purchase a forever home is not going to want to go with this typeof loan.
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Why Is The Total Interest Higher Than That Of A Standard Mortgage
The total interest paid is higher on interest-only mortgages because during the first phase of the loan, you’re not reducing the loan principle . And if you’re not paying down the principle, you’re still paying interest on the full amount of the loan each month. So 4% of $250,000 is the same in the first year of the term as it is in the fifth, unless you make prepayments.
How To Calculate Your Monthly Mortgage Payment
You can calculate your monthly mortgage payments using the following formula:
M = P /
In order to find your monthly payment amount “M,” you need to plug in the following three numbers from your loan:
- P = Principal amount
- I = Interest rate on the mortgage
- N = Number of periods
A good way to remember the inputs for this formula is the acronym PIN, which you need to “unlock” your monthly payment amount. If you know your principal, interest rate and number of periods, you can calculate both the monthly mortgage payment and the total cost of the loan. Note that the formula only gives you the monthly costs of principal and interest, so you’ll need to add other expenses like taxes and insurance afterward.
Also keep in mind that most lender quotes provide rates and term information in annual terms. Since the goal of this formula is to calculate the monthly payment amount, the interest rate “I” and the number of periods “N” must be converted into a monthly format. This means that you must convert your variables through the following steps:
N = 30 years X 12 months = 360
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What Is The Formula For Mortgage Payment
Formula for calculating a mortgage payment P = the principal amount. i = your monthly interest rate. Your lender likely lists interest rates as an annual figure, so youll need to divide by 12, for each month of the year. So, if your rate is 5%, then the monthly rate will look like this: 0.05/12 = 0.004167.
Interest Only And Repayment Mortgages Compared
As you are only paying the interest each month, interest only mortgages have lower monthly payments than those of repayment mortgages. With a repayment mortgage, you will pay back the interest as well as a small part of the capital amount borrowed each month.
With lower monthly payments, interest only mortgages are more affordable in the short term, keeping your monthly outgoings to a minimum. However, you must have a suitable plan to be able to pay the capital owed at the end of the term and lenders will want you to prove you have an adequate repayment plan in place.
With a repayment mortgage, your monthly repayments will be higher but at the end of the term, if you have made all of your monthly repayments, you will owe the lender nothing and own the property outright.
You can find out more about the different types of mortgages here which are applicable to both interest only and also repayment.
Use our handy calculators to compare what your monthly payments will be for an interest only mortgage and for repayment mortgage options.
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Whats The Difference Between An Interest
In the big wide world there are two types of mortgages: principal and interest and interest-only loan.
Principal and interest loans are most common with owner-occupiers and repayments are both the interest on the loan and a portion of the actual money you loaned from the bank.
These mortgages are typically set to a 30-year term, and interest rates fluctuate depending on how long the borrower wants to fix the interest rate for.
As stated above, interest-only loans are a temporary loan structure where the borrower only pays the interest on the loan and doesnt pay any of the principal mortgage back.
As ironic as it may sound, investors who take out interest-only loans do end up paying more interest over time.
Why? Because you are only paying interest the size of your loan never decreases. This means the total amount of interest you pay goes up in a straight line.
But with a P+I loan you are continuously paying the debt down, which means you pay less interest as the size of your loan starts to decrease.
So, with principal and interest mortgages your repayments are larger, but the interest you pay is lower – as your debt goes down.
Who Can Get One?
Ways To Repay An Interest Only Mortgage
If you are are looking into taking out an interest only mortgage, acceptable repayment plans might include:
- Pension lump sums a quarter of a pensions value can be taken tax free
- The sale of other assets such as second properties
- Investment policies
- Downsizing to a less expensive property at the end of the term
Lenders all have varying criteria and they may make occasional checks throughout the mortgages term to ensure that your repayment plan is still in place and on track to enable you to make the final payment.
With so many variables and because everyones situation is different, it is vital you get individual advice before you decide to take out an interest only mortgage. Speak to one of our advisers and we can help with your decision making process.
If you already have an interest only mortgage and are looking into how you will repay the capital at the end of its term, options might include:
The list above is not exhaustive so it is important to seek personal advice for your own situation. If you are aware of a potential shortfall in funds to repay your mortgage balance then it is imperative that you look for a solution sooner rather than later.
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See What Your Payments May Be At All Stages Of An Interest
Use this calculator to estimate your monthly or annual payments for an interest-only mortgage. Newfi offers a 40 year mortgage with a 10 year interest-only period and 30 year fixed-rate term after that.
About Newfis IO Mortgage Calculator
Newfi is making it easier for people to see what mortgage payments they might be responsible for if they have a 40-year Interest-Only loan.
A highly respected Independent Mortgage Banker, Newfi uses this proprietary mortgage loan product to help borrowers that are looking to pay only the interest for an initial term of their home loans.
This Interest-Only Mortgage Calculator is made specifically for people borrowing for a home purchase or a home refinance using the innovative 40-year Interest-Only mortgage loan.
This benefits new homeowners who might be getting used to a mortgage payment, or using savings for furnishing the home, or taking care of other costs of the first years of home ownership.
Some borrowers look to the 40-Year IO to compare their current mortgage payment to one where they would just be responsible for the interest.
A Cash-Out IO mortgage loan would offer Interest-Only payments. It makes borrowing money even cheaper and allows you to make the value in your home work for you.
Frequently Asked Questions
Why trust Newfi Lending?
Understanding Your Mortgage Payment
Monthly mortgage payment = Principal + Interest + Escrow Account Payment
Escrow account = Homeowners Insurance + Property Taxes + PMI
The lump sum due each month to your mortgage lender breaks down into several different items. Most homebuyers have an escrow account, which is the account your lender uses to pay your property tax bill and homeowners insurance. That means the bill you receive each month for your mortgage includes not only the principal and interest payment , but also property taxes, home insurance and, in some cases, private mortgage insurance.
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What Is Homeowners Insurance
Homeowners insurance is a policy you purchase from an insurance provider that covers you in case of theft, fire or storm damage to your home. Flood or earthquake insurance is generally a separate policy. Homeowners insurance can cost anywhere from a few hundred dollars to thousands of dollars depending on the size and location of the home.
When you borrow money to buy a home, your lender requires you to have homeowners insurance. This type of insurance policy protects the lenders collateral in case of fire or other damage-causing events.
Mortgage Effective Annual Rate Formula
To account for semi-annual compounding, you can calculate your mortgages effective annual rate . The number of compounding periods in a year is two. To use the effective annual rate formula below, convert your interest rate from a percent into decimals.
For example, if your mortgage lender quotes a mortgage rate of 3%, then your effective annual rate will be:
If your mortgage lender quotes a mortgage rate of 5%, then your effective annual rate will be:
This calculation assumes that interest will be compounded semi-annually, which is the law for mortgages in Canada. For a more general formula for EAR:
Where n is the number of compounding periods in a year. For example, if interest is being compounded monthly, then n will be 12. If interest is only compounded once a year, then n will be 1.
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See The Real Cost Of Debt
The above calculator also has a second tab which shows the current interest rates on savings accounts. This further shows how expensive debt is because most forms of consumer debt charge a far higher rate of interest than banks pay savers AND savers get taxed on interest income they earn at their ordinary tax rates. The table below shows the full cost of $10,000 of debt at various rates of interest. While different consumer debt types typically have different amounts, we kept the amount column constant to show the absolute difference in cost per Dollar earned or borrowed. We also presumed interest-only payments on the debt & a 25% tax rate on income.
Mortgage Interest Compounding In Canada
Mortgage interest in Canada is compounded semi-annually. This means that while you might be making monthly mortgage payments, your mortgage interest will only be compounded twice a year. Semi-annual compounding saves you money compared to monthly compounding. Thats because interest will be charged on top of your interest less often, giving interest less room to grow.
To see how this works, lets first look at credit cards. Not all credit cards in Canada chargecompound interest, but for those that do, they usually are compounded monthly. The unpaid interest is added to the credit card balance, which will then be charged interest if it continues to be unpaid. For example, you purchased an item for $1,000 and charged it to your credit card which has an interest rate of 20%. You decide not to pay it off and make no payments. To simplify, assume that there is no minimum required payment.
The same applies to mortgages, but instead of monthly compounding, the compounding period for mortgages in Canada is semi-annually. Instead of adding unpaid interest to your balance every month like a credit card, a mortgage lender is limited to adding unpaid interest to your mortgage balance twice a year. In other words, this affects your actual interest rate based on the interest being charged.
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How Do I Get An Interest Only Mortgage
In order to qualify for an interest-only mortgage, you must have a minimum down payment of 20%, and you may use the mortgage as a line of credit, but may not borrow over a loan to value ratio of 80%. The maximum amortization is 25 years.
Contact Super Brokers to find out if an interest-only mortgage makes sense for you and your future.
The Advantages Of Interest Only Loans
Like any other kind of mortgage out there, this type of loancomes with its own unique set of positives and negatives. Generally speaking,the advantages of having this kind of loan are pretty straightforward.
The first is that they mean much lower monthly paymentsduring the interest-only term. That can mean greater financial flexibility duringthat term to perhaps save towards paying off the principal of the mortgageitself.
On the same side of that coin, there is more money toinvest. Having that extra money to invest during that 5-7 year period meansthat there is substantial potential for personal investment growth. That couldleave the borrower in a much better position financially when the interest-onlyportion expires.
For this type of loan, the borrower can purchase a muchlarger home later by qualifying for a bigger loan amount. During thisinterest-only period, the whole amount of the monthly payment for mortgagesthat are up to $750,000 also qualify as tax-deductible, so there are taxsavings to be had.
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For What Types Of Borrowers Are Interest
Pay Principal When Convenient:Buy More House:Invest the Cash Flow:Borrow On Your Mortgage to Invest in Common StockIs Unused Home Equity a Missed FortuneQuick Capital Gain: Questions About Option ARMsIs Interest-Only Best For a Quick TurnoverAllocate Cash Flow to Second Mortgage:Payment Responsive to Principal ReductionWhen Will Extra Payments Reduce Monthly Payments
How Much Will My Payments Be With An Interest
Calculate the payment amount for an interest-only mortgage loan. An interest-only loan pays no principal in the early years of the loan then converts to a traditional amortized loan for the remainder of the mortgage length. The payments are lower during the interest-only period since no principal is being paid. The payment goes up sharply after the interest-only period since you must pay the balance of principal plus interest during the remaining loan years. Enter your sale price, any down payment youre making, the length of the loan, and the points and closing costs. Then enter the interest rates, lengths, and any additional principal amounts you plan to pay each month for the interest-only and amortized periods of the loan. This calculator will then show you the monthly payment amounts for the interest-only and amortized periods. It will also calculate the total amount of interest you will pay, the total amount of money you will spend over the life of the loan, and the anticipated payoff time. You can also display and/or print the full amortization schedule for your loan.
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