Last updated: 12th February 2020
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Put simply, an interest rate’s how much it costs to borrow the cash. Most mortgage interest rates are annual rates, however interest is calculated monthly, but it’s quite simple to work out how much you’ll pay in interest:
Let’s look at a 3% rate on a £150,000 loan:
And that’s what you’ll pay in interest each month. Sort of...
Of course, your actual loan amount will decrease as you pay it off every month, which you’d think would mean that the repayments should go down as total interest prices drop. But it doesn’t. And that’s because of lovely amortization.
Basically, your bank will work it so that you have the same monthly payments throughout the term, but a higher percentage of that will be interest at the start of the term, while at the end of the term, the interest proportion will be lower and the amount you repay of the loan higher.
Here's roughly what you can expect to happen with your monthly repayments:
The annual percentage rate (APR) is the mortgage interest rate plus other charges, which could include fees, charges and discounts. By the way, a representative APR is the APR at least 51% of successful applicants get.
With Mojo, you can pop in a few details and see what mortgages you can get right now. We'll clearly show you what rates are on offer and what's the total cost over the term of the mortgage.
As mentioned, most lenders work out your interest on a monthly basis and advertise the rate on an annual calculation.
With a daily interest or simple interest mortgage, interest will be added to your balance each month based on the number of days in the coming month.
You’ll see a decreasing monthly balance which will take into account the amount you paid last month and the amount of interested added for the coming month. There’s not a huge amount in it between daily and monthly interest, with the difference between the longest and shortest month being just 3 days.
On an annual interest mortgage, your lender will take your balance on 31st December of the previous year, calculate the amount of interest they expect you to pay in the coming year, and divide that amount by 12.
In the first year of your mortgage, they’ll take the balance from the date they lend it to you and calculate what they expect you to have to pay until 31st December.
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Here's a few other articles you may find useful.
How does a vale rate work? What options are out there, and the pros and cons of choosing a variable rate mortgage.
Fixed rate mortgages can give you the peace of mind of knowing what your repayments will be every month – any drawbacks?