When it comes to getting a mortgage, it’s all about getting the right deal and paying as little interest as possible. While the amount you’re borrowing has a big impact on the amount you have to repay, the other important factor is interest, so it’s important to know how it works, and how to make the most of it.
The general rule of mortgage shopping is that you look for the lowest deal around, for example, high street bank Santander are offering a particularly good rate at the moment. However, worthwhile as it may be to head to a mortgage calculator from Santander and work out your repayments based on current rates, you have to look more long term.
First of all, there is the phenomenon of compound interest. Compound interest is when you have to pay interest on the interest that you’ve already racked up. So, for example, if you’re paying 5% on £100,000, at the end of the first year (assuming you pay nothing back) you’ll owe £105,000, but, at the end of the second year, you will owe 5% of that £105,000 (£5,250), and it goes up from there.
This means, at the end of a 25 year mortgage, although you’d think you’d just have to pay back the original £100,000 that you borrowed, and £125,000 (5% for each year), you actually have to pay back £238,630.
Take back control of your finances!
Get a FREE checklist for the money moves to make in the New Year.
Also get new articles, advice, and tips delivered right in your email inbox with our newsletter!
But, it gets a little more complex because with a repayment mortgage you’re paying back the underlying debt as you go, so after ten years of paying off your mortgage, you’ll actually be generating less interest than you were to begin with. This might mean your repayments go down, but generally they stay at the same level allowing you to pay off your mortgage more quickly.
This fact (that you’ve paid off a lot of interest but not so much capital) often makes people think twice before changing their provider, but you don’t need to be afraid of changing to get a better deal. What you do have to bear in mind, on the other hand, is that you need to get the same terms from your new provider as from your old if you can. So, if you’ve got fifteen years left on your mortgage when you change, get a mortgage for fifteen years with the same level of compound interest from your new provider. Of course, when the majority of people remortgage they do so under difficult conditions, so you may be looking for different terms.
At the end of the day, it is the interest which dictates how much you have to pay in the long run, more than any other factor, keep an eye on the small print, many deals are good for a few years and then revert to less flattering terms and make sure they add these into your calculations when looking for the best deal.