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[deleted] t1_iy8bnu1 wrote

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Twin_Spoons t1_iy8dua0 wrote

Interest rates are rising quickly everywhere due to the efforts of central banks to bring down inflation. Essentially, the central bank in the UK is making it more expensive for regular banks to borrow money. In a sense, those regular banks borrowed the money for your house from the central bank, so they're seeing the exact same kind of squeeze you're seeing, only they can pass it on to you by raising your rates.

Every bank is getting squeezed like this, so it will be impossible to find a rate like the one you had a few years ago. However, it could be worth it to talk to a competing bank to see if they can offer you better than your current bank. In an era of rising prices, some businesses will try to raise theirs higher than necessary and hope nobody notices, and the best way to police this is with competition.

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homeboi808 t1_iy8jm3z wrote

When you make the required monthly minimum payment, you are paying towards both the principal (loan amount) and the interest added.

At the beginning, the majority of the payment is going towards the interest and then the ratio slowly changes so that towards the end, it is the principal that is what most of the payment is for.

When the interest rates change, they look at how much principal is left and then redo the payment amount with the new percentage and years left. So, if you have $65,000 left and you've been paying for 5 years, then it's the same math as a $65,000 loan on a 25yr repayment. So look at how much principal is left on the loan and then the time left on the 30 years.

Now, your monthly payments are sometimes locked in until you hit a "trigger" where the monthly payments need to be adjusted. If it isn't adjusted, then you keep paying the same monthly but then have balloon payments or longer payoff length (more than 30 years).

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Belbarid t1_iy8pr85 wrote

>I just don't understand how they can calculate this amount of difference in repayments..

Amortization tables and calculators. U.K. is probably a little different, but in essence an amortization table shows the relationship between your total mortgage amount, your interest rate, your remaining principle amount, your loan length, and your monthly payment. Change any part, such as your interest rate, and the table can be rebuilt showing the effect of that change. If your interest rate goes up, the table will show how your payment is affected, based on how much longer you have on your loan and how much of the principle you've paid off.

Which leads me to a big piece of general advice. Overpay and make sure that your overpayment is applied to principle and is not applied to your next payment. Even small reductions in your principle can have a large effect on your length of payment, which in turn reduces the amount of interest you pay.

Find a good amortization calculator online and play with the numbers. Find out what happens if you overpay £50 per month, for example.

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Unlikely_Concept5107 t1_iy9yyih wrote

Here’s a question for you (if you don’t mind answering!).

If you calculate what you can afford to pay per month when taking out a mortgage, are you better going for a lower repayment then overpaying the difference or just taking it out based on the max you can afford?

(I realise it’s stupid to take out the absolute max you can afford and should budget for rate increases, changes in circumstances, etc. but let’s go with it for the sake of this example).

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Belbarid t1_iyaxn9k wrote

The last two times I bought a house, I started with a soft limit and a hard limit on my mortgage payment. The soft limit is how much I intend to pay, the hard limit is the amount I will not go over, no matter what. Both amounts will be less than the max I can absolutely afford.

From there, my approach is to look at the numbers for a 30-year and a 15-year mortgage. Once I get those, I use an amortization calculator to see what happens when I overpay. If the payment amount is lower than the soft limit, I use that as the actual amount I pay. If the payment is between the two limits, I assume I pay the hard limit. Then I choose the mortgage that has me paying the least amount of interest over the lifetime of the loan. The mortgage on our last house was a 15 year and we had it paid off in 9 without stressing our budget.

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YWGtrapped t1_iy8xrsi wrote

Interest rates set by central banks are rising (reason, which doesn't change that it's happening: in much of the world to fight inflation, and in the UK also to try to protect the currency after it started rapidly losing value due to government policy)

When central banks raise rates, this makes it more expensive to borrow money.

Because you're on a variable rate, it varies with the rate set by the central bank. Because they made borrowing all money more expensive, the money you borrowed got more expensive.

If you had a fixed rate, you wouldn't suffer from it getting more expensive when they raise rates, but you also wouldn't benefit from it getting cheaper when they lower rates.

How much more expensive it gets depends on the amount borrowed, time left, and rate changes, and can be calculated using lots of online mortgage calculators.

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Flair_Helper t1_iya3ecz wrote

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