Why your first five years barely move the balance

Almost every first-time buyer we speak to has the same reaction to their first annual statement: they have paid £16,542 and the balance has moved by £5,927.

Nothing has gone wrong. That is what a repayment mortgage does.

The arithmetic

Interest is charged on what is outstanding. On a £256,050 balance at 4.19%, the first month’s interest is £894. The payment is £1,379. So £485 buys bricks and £894 evaporates, and the next month’s interest is charged on £255,565 instead, which is very slightly less.

That “very slightly” compounds in your favour for 300 months. By month 110 more than half of each payment is going on the balance. By month 280 almost all of it is.

What follows from it

The rate matters most when the balance is highest, which is now. A rate that is a percentage point better saves you more in the first five years than in the last ten, because there is more balance for it to act on.

A short fix is not automatically cheaper. A two-year fix at 4.48% beats a five-year at 4.19% for twenty-four months and then puts you back in the market at whatever rates happen to be. That is a view on interest rates, and if you do not have one, say so. It is a legitimate reason to fix for longer.

Overpayments are worth the most early. £200 a month from month one takes five years off this term. The same £200 started in year fifteen takes twenty months off it.

What we would ask you

Whether you would rather have the lowest possible payment or the shortest possible term. Almost nobody is asked this, and it changes the recommendation more than the rate does.

If you want us to run it on your own numbers, book a call.