Why is less capital coming off mortgage with higher interest rates??

jimbob1974 · 03-04-2023 10:54am #1

Probably a simple answer, but I can't understand it. Since mortgage interest rates have started increasing, mortgage payments have increased (naturally), however I've noticed that what's coming off my capital is less than was it used to be. I would have thought that increased rates would have had no effect on capital reduction? Apologies if "capital "is the wrong word. Anyone any ideas??

walterking · 03-04-2023 8:55pm

Capital is the correct word.

Amoritisation is the process and it recalculates an average payment amount for the remaining months. When rates increase the capital payment decrease for a while, but at some point in the future they become higher than when the interest rates was lower. The aim is always to have the figure at zero at the end of the payment period

Not the easiest to explain in writing, but this might explain it https://www.investopedia.com/terms/a/amortization.asp

jimbob1974 · 03-04-2023 10:25pm

Thanks for that answer. Seems like banks just use increasing rates to slow down the rate of capital reduction. Logically to me when interest rates increase the extra mortgage repayment should be the interest and the capital reduction stayes the same, but from what you're saying it looks like the banks eat into what was previously capital as more interest, like they're starting the mortgage from scratch again and recalculating based on the remaining term 😠

Donald Trump · 03-04-2023 11:07pm

https://www.boards.ie/discussion/comment/120437646#Comment_120437646

No jimbob. They try to level out the payments over the life of the loan. You can solve for the level payment using geometric series. I'm not going to explain it to you but I will give a simple example of a fixed loan where you want to pay off a 100 Euro loan over 5 years where the interest rate is 10% (simple interest) and you make one payment at the end of the year.

The solution for the above example is you pay 26.38 per year.

At the end of year 1 you pay 10 Euro interest and 16.38 off the principal to leave you owing 83.62

At the end of year 2 you pay 8.36 interest and 18.02 off the principal to leave you owing 65.60

At the end of year 3 you pay 6.56 interest and 19.82 off the principal to leave you owing 45.78

At the end of year 4 you pay 4.58 interest and 21.80 off the principal to leave you owning 23.98

At the end of year 4 you pay 2.40 interest and 23.98 off the principal to leave you owing 0

What happens if the interest rate jumps to 15% at the end of year 2 when you have 65.60 outstanding? Well the remaining payments are calculated as being a level 28.73

At the end of year 3 you pay 9.84 interest and 18.89 off the principal to leave you owing 46.71

At the end of year 4 you pay 7.01 interest and 21.72 off the principal to leave you owing 24.98

At the end of year 5 you pay 3.75 interest and 24.98 off the principal to leave you owing 0

What you appear to be thinking, i.e. keeping the original amortization schedule (if rates are 10% for the first two years and 15% for the last 3) would have you paying:

29.66

28.67

27.58

in the last 3 years. So it is no longer level and you have inflicted more pain on yourself in year 3.

The above is a simplified explanation.

jimbob1974 · 04-04-2023 7:59am

Thanks for that Donald, makes sense

daheff · 09-04-2023 9:03pm

Jimbob, capital repayments should always be going up (so long as your term stays the same). You can see monthly fluctuations because some months have less days than others.

Higher interest rates should mean a higher monthly repayment, but that shouldn't impact the capital repayments.

If you have a statement saying you are paying less capital, then query it with your bank asap.

walterking · 10-04-2023 8:49am

https://www.boards.ie/discussion/comment/120459938#Comment_120459938

Correct and Incorrect

When there is a rate change, the new interest rate is assumed for calculation purposes to be the rate you will pay until the end of the mortgage and therefore it recalculates the payments over the entire remaining term and you get a recalculation of capital and interest replayments.

When interest rates rise it will see a small drop in the initial capital part for the 1st month after the rates rise. Thereafter the capital amount starts increase each month again.

On the next rate change, the calculation is done all over again and again there's a change in capital repayment.

With several upward rate changes in quick succession it would almost look like every other month the capital repayment is dropping, but now with the potential of a few months without a rate increase, the capital payments will increase again.

Then when the inevitable rate drops come next year, the rate change will see capital repayment jump on each rate reduction. (when I say jump, it may change by a couple of euro)

But for rising rates and capital repayment dropping slightly with each rise in rates - this is normal

NewbridgeIR · 10-04-2023 10:05am

Look at your mortgage statement. On the debit side is the monthly interest charge. On the credit side is the repayment.

When interest rates increase, the monthly interest charge goes up so the overall reduction in the balance isn't as high as it was.

kirk. · 11-04-2023 5:34am

What way are average variable rates expected to go this year and next

Q&A · 11-04-2023 6:28am

https://www.boards.ie/discussion/comment/120463692#Comment_120463692

Up!

walterking · 12-04-2023 6:47pm

https://www.boards.ie/discussion/comment/120463692#Comment_120463692

Variable rates near certain to rise even if the ECB doesn't increase any further.

Once there's pressure on banks to increase deposit rates you will see variable loan rates increase.

Currently deposits earning near zero are subsidising the variable mortgage rates.

With some places offering up to 2%, deposits may start moving out of the Irish banks and they will be forced to react.

Why is less capital coming off mortgage with higher interest rates??

Comments