Mortgages

[Jerrek]

I'm taking some actuarial science courses, and we were discussing mortages. Now I'm wondering... The prof mentioned that in Europe they do mortgages differently than from Canada and the United STates. How?

Here is how we do it:

Principal: $200,000

Amortization Period: 25 years (this is the usual)

Interest rate: 3% compounded semiannually


This translates into 0.2484516% per month. [ (1 + j)^12 = (1.015)^2 ]


Therefore, you pay $946.49 per month for the next 25 years. At the end of 12 years, you are done paying off your mortgage.

In total, you pay ($946.49)(12)(25) = $283,947, meaning, $83,947 is interest.

[skyblueheroes]

Similar, only over here they have all sorts of different kinds, thus plenty of different interest rates (it can also vary a lot from one provider to another).

I'm sure you have different types over there too, but here we have....

Capped
Collared and Capped
Interest Only
Discounted
Fixed
Cash Back
'One' Accounts
Variable

etc etc...

Some providers still hang onto yearly interest too (worked out once a year and added to total), but most providers these days work it out on a daily basis. So, if you pay more off, it comes off your total straight away.

Hope that was what you were asking...........

[andygrif]

The difference is that the rate of interest is not fixed for the course of the loan. Over there, and in quite a few other places in Europe - if you borrow money over 25 years at 3% then you pay the 3% interest for the whole of the 25 years.

Here, if the Bank of Englang puts the interest rates up then it's likely your mortage interest rates will go up too. There are some lenders that offer fixed rates, but normally only for a finite period, like 2/3 years, and usually this means that you will pay slightly more than the current variable mortage interest rate for the privalege.

A few now offer ten year fixed, but there is some talk now of introducing a fixed rate for the full term like you have there. That way people will not be caught out (as happened in the late 80's) by sky-rocketing interest rates (I seem to remember that 15% was the highest back then) and not being able to afford their mortgage payments - thus losing their homes.

[ian@huth]

It looks like you pay a lot less in interest payments over there but is 3% anything like representative?

Have a play around with the mortgage calculater on a site like www.halifax.co.uk to see some of the ways we do it over here.

[bob_builder]

Originally Posted by ianathuth

It looks like you pay a lot less in interest payments over there but is 3% anything like representative?

Have a play around with the mortgage calculater on a site like www.halifax.co.uk to see some of the ways we do it over here.

Well the US base rate is currently 1% so maybe Canada is similar. Here in the UK our base rate has just gone up to 4.5% and is predicted to be 5% by the end of the year.

Using the mortgage calculator at http://www.nationwide.co.uk/mortgage/tools/default.htm for £200,00 0 over 25 years gives a basic quote of £1,185. 56 per month, Total Amount Payable £356,13 1.88 - meaning £156,13 1.88 is interest!

Ours is pretty much the same. My mortgage interest is calculated daily and using your example

Amount 200,000
Int 3%
Term 25 Yrs

payment = loan amount(interest/(1-(1+interest)^period in months)

948.42 = 200000(0.0025/(1-(1+0.0025)^300)

total paid 284526

84526 of which is interest

As people have mentioned, my mortgage isnt fixed interest. It floats with the base rate.

[Jerrek]

Well here you can pick whether you want a fixed rate over the amortization period, or whether you'll let it fluctuate. It usually is a little more costly to fix the interest rate because you get that extra security, and at this time I doubt interest rates will go down more.

The Bank of Canada pretty much follows what the Federal Reserve does. They lower interest rates, BoC does too. They raise it, BoC does that too.

In Canada, the bank rate is 2.25% and the prime rate is 3.25%. I think my parents have their mortgage fixed at prime - 1%, meaning, if interest rates go up, their interest rate will go up too.

[bob_builder]

Originally Posted by Jerrek

In Canada, the bank rate is 2.25% and the prime rate is 3.25%. I think my parents have their mortgage fixed at prime - 1%, meaning, if interest rates go up, their interest rate will go up too.

The Bank of England sets a base rate (currently 4.25%). Mortgages are at rates greater than the base rate, savings at rates lower than the base rate.

For example Nationwide (the county's largest Building Society) has the following mortgages available:

Base Mortgage Rate (5.49%) - Guaranteed to be no more than 2% above the Bank of England base rate but can be what ever feel like otherwise.

Tracker (Tracks the BoE Base Rate for a period of 2, 3 or 5 years):
2 Years BR + 0.04% = 4.29%
3 Years BR + 0.14% = 4.39%
5 Years BR + 0.24% = 4.49%

Fixed Rate (for a period of 2, 3 or 5 years):
2 Years 5.34%
3 Years 5.64%
5 Years 5.84%

Nationwide typically have near the lowest ongoing rates available in the UK.

[zovat]

Originally Posted by bob_builder

Nationwide typically have near the lowest ongoing rates available in the UK.

Which is probably why I am in the middle of switching my mortgage to them....

The other thing to consider is whether you get a repayment mortgage or an interest only one....

I am not sure whether the US/Canada have this option - but over here you can pay the lender Just the interest over the period of the loan, then pay off the lump sum at the end...

The old name for this was an endowment mortgage, because you took out an endowment policy to cover the actual cost.

The problem with this form is that if th stock matket performs badly, you may be left with insuffecient finds at the end of the investment period, and have to take out a further loan..
On the other hand, if the stock market performs well, you can end up with a lump sum big enough to pay of the mortgage, plus have some money to pay off other debts/have a holiday etc.
The interest only option is becoming less popular now, as the stock market is pretty poor, but during the 80s and 90s it was the most common form of mortgage, unfortunately some people are now finding out that they do not have enough to pay off the loan, and are re-mortgaging - meaning that they end up having a much longer mortgage and pay a huge amount of interest...

[etccarmageddon]

www.marsdenbs.co.uk do a 5 year fixed rate at 5.55% and also a 10 year product at 5.69%.

http://www.marsdenbs.co.uk/pages/mor...ixedframe.html