Mortgage Payments Tutorial Lesson and Calculation on what you need to know in 2024
6 min read
What is a Mortgage?
Mortgage is a type of loan product that the bank lends to customers to purchase a home. As a result of lending money to allow customers to purchase a home, the bank will in turn will receive interest payments.
What is interest Payments?
Interest Payments are usually dictated by interest rates set by the bank. For example the cheapest interest rate offered by HSBC was 1.99% after the global financial crisis in 2008. With the current economic climate the most expensive interest rate is 6.99%.
Why is there a Fixed Term Mortgage and Variable Rate Mortgage?
Fixed Term Mortgages are like contracts where you agree the terms and conditions set out by the bank in order to obtain lower interest rates. Usually this type of mortgage have penalties overpaying early but the good news is that each year the bank will take allow an annual payment allowance of 10% from the balance owed to overpay up to 10% in that respective year.
Variable Rate Mortgage does not have any restrictions on time and have no penalties on overpaying your house for instance if you are selling your house and under a variable rate mortgage you would not have to pay penalties on paying back your mortgage to the lender. However this is usually the most expensive option as you can see from the table below 6.99% will need to be paid to the bank per year on the mortgage borrowed.
Figure 1 HSBC Fixed Term Mortgage on a 95% Maximum Loan to Value (LTV) August 2024
What is a Maximum Loan to Value?
The maximum loan to value is basically how much money you owed from the bank (mortgage) against the current value of the property (Current Mortgage / Current Value Price of the Property).
For example, Bob decides to borrow a mortgage of £95,000 to buy a £100,000 flat. Then Bob would manage to make the criteria above as his maximum loan to value (£95,000 / £100,000) which is 95%. This allows Bob to choose the interest rate from the 3 options provided by the bank. If Bob were to borrow £96,000 the bank would immediately reject his request as it is over the 95% Maximum Loan to Value the banks can offer.
How is mortgage payment calculated?
The annual mortgage payment is derived from a simple equation which is:
Annual Payment (main principal) = M [r(1+r)N / (1+r)N-1]
M – Mortgage borrowed
r – interest rate
N – the number of years
