Mortgages   How Much Are You Really Borrowing?

When considering a mortgage do you consider all of the right questions, for example do you consider which bank is best because of their reputation or do you instead look solely at the interest rate tables, do you look at the ability to switch mortgage provider or do you look at how long they can guarantee a given mortgage rate? These are of course all important questions and ones that should be given due consideration when choosing a mortgage provider   but there are more important questions. 

Most of us consider a mortgage to be one of life necessary evils, after all it s not nice to be in debt to the tune of the house price right. Well there s actually one question that most people ignore, if you re borrowing $100,000.00 how much are you actually paying back? 

The reason that most people ignore this fact when they consider choosing a mortgage, refinancing or embarking on any other kind of equity refinance is that on paper you are borrowing a given sum (100 K in this case). 

Wrong! 

You are borrowing a few thousand now but that is not the amount that you ll be paying back. 

This may seem like a bit of a nonsense statement but lets analyse it in a little detail. 

We initially borrow $100,000 
The interest rate is 4.25% - per year 
Our repayments are the interest + 4% 
We take the mortgage/refinance over 25 years. 

So our yearly figures are as follows: 

Year 1: 

Interest = $100,000 / 100 * 4.25 = $4,250 
Amortisation (paying back) =$100,000 / 100 * 4 = $4,000 

Total to pay back this year $8,250 

So now in year two we only owe $96,000, so it looks like this: 

Year2: 

Interest = $96,000 / 100 * 4.25 = $4,080 
Amortisation (paying back) =$100,000 / 100 * 1 = $4,000 

Total to pay back this year $8,080 

So as you can see, there s less interest to pay because we re clearing the initial balance, but still we re paying 4.25% per year, so if we borrowed $100,000 to start with how much are we actually paying back in the end? 

We re actually paying back $151,000 in the end, that s right, the interest on the mortgage is $51,000   doesn t seem such a good rate any more does it. But what if you decide to pay back over a longer period, that might help right? Wrong, if you double the term to 50 years (so paying back 2% per year), then the interest effectively doubles the amount of your mortgage to just over $200,000. 

Now perhaps when people discuss getting the best rate for the mortgage and seem to be messing about for a few points difference you can see why, perhaps now you can also understand that it is better to take a mortgage over the shortest possible time frame   it does mean that you ll need to amortise faster but it also means that you ll potentially save yourself thousands in interest payments. 

If you are not financially in a position to really negotiate initially then perhaps one of the most important questions you should be asking is whether or not there is an early repayment option   you might have enough money to pay it of early but what s the point if the bank will still charge you the same amount of interest? 

If you want to run the simulation yourself here s the code in C#, simply create a new project, add a button, double click on the button and cut/paste the following code: 

int years =25; // years for mortgage 
float mVal = 100000; // total amount borrowed 
float intRate = (float)3.00; // interest rate 
float result =0; 
float totalAmountInt =0; // total interest payable 
float yearlyAmount = mVal / years; // repayment per year 

for (int i = 1, i 

I don't seem to be able to post the rest of the code, email me and I'll send it to you.

Author, Paul Foley,