House purchase - 10% deposit versus 20% and other factors

[garnet]

So your mortgage isn't a repayment mortgage of £300k+ with an interest rate of 2.3%+ over 20-25 years with a 10-20% deposit.

What were the figures for yours when you took it out?

repayment, but with 50% deposit, for 25 years @2.7%

[WTFH]

repayment, but with 50% deposit, for 25 years @2.7%

So, a 50% deposit. Let's crunch those numbers...
£380k house with a 50% deposit means a mortgage of £190k


£190k in year 1 you pay £10452 (£871 per month) in repayments of which £5399 is to reduce the debt.
5399/10452 = 51.6%, i.e 48.4% goes towards interest. Not 33%.


Explain how, in year 1, you only paid 33% to interest?
Yes, if you take the total interest paid over 25 years and spread it out over the years you get a figure of around 30%, but that's not how mortgages work.

[WordIsBond]

So, a 50% deposit. Let's crunch those numbers...

Yes. This isn't hard to calculate. And you'd need a very short mortgage or a very low interest rate to be paying only 33% in interest in the first year.

In OP's case, the 10% deposit would leave a mortgage of £342K. At an interest rate of 2.54%, that leaves annual interest of £8686, or interest the first month of £723.90. On a payment of £1541, that's about 47%.

A 20% deposit leaves a mortgage of £304K. Interest rate 2.34% on that amount gives annual interest of £7113, or interest the first month of £592.80. On a payment of £1339 / month, that's about 44%.

The easiest way to reduce the initial percentage of interest (and the total interest over the life of the loan) is to pay more principal. There are three ways to do this.

1. You can make a larger deposit. This may not significantly change the percentage interest on your actual payments, but that's because your actual payments have been reduced, too. If you view the deposit as logically equivalent to paying extra principal every month, just bringing it all forward to save interest, it is decreasing the overall percentage of all your payments that go to interest.
2. You can shorten your mortgage term. This forces you to pay extra principal each month, which obviously increases the percentage that goes to principal.
3. You can find a mortgage with a lower interest rate.

In OP's case, using the larger deposit accomplishes both #1 & #3. Operating simply from the point of view of saving interest, it's a no-brainer. Obviously, in OP's case, there is a huge tax hit, which argues the other direction. Even if you have the funds available without the tax hit, you have to consider the opportunity cost -- is there something you could/should do with that money that would be better / more important. But as I said above, I'd do it.

[WTFH]

House purchase - 10% deposit versus 20% and other factors

Yes. This isn't hard to calculate. And you'd need a very short mortgage or a very low interest rate to be paying only 33% in interest in the first year.

I've just played with a few figures. To hit 33% in the first year, the interest rate needs to be approx 1.7% on a 25 year, or 2% on 20 years.

As for your other calculations, they are a bit more accurate than mine - I went for 40k instead of 38k on the deposit just to make it easier.

[WordIsBond]

I've just played with a few figures. To hit 33% in the first year, the interest rate needs to be approx 1.7% on a 25 year, or 2% on 20 years.

I was too lazy to figure that out. Far better as I get old, fat, and complacent to just throw the general principle out there and have somebody who works for me nail down the details.

Want a job?

I'll give myself credit, I DID do the calcs for OP's case since the specifics might actually matter to someone's actual life, though. I'm not THAT lazy if things actually matter. I do things like this occasionally so I can pat myself on the back that I really am not totally worthless to mankind, at least not always. Now, I can go back to being my reprehensible and lazy self for a few days without feeling too much remorse, all because of a few calculations on the Internet. Ain't life grand?

[WTFH]

It was just an interesting number puzzle, but it shows that the other poster doesn't know their coccyx from their radius.


As for this job offer, I guess you need 2 references...

[WordIsBond]

it shows that the other poster doesn't know their coccyx from their radius.

Anyone who has been paying attention to him previously knew that already. But at least he posts with great certainty. Ignorance with certainty, it's glorious. Since my arrogance takes a hit every time I do something stupid, I appreciate people like him (he's not the only one) who restore the balance from time to time and help me feel superior again.

Forward! (I guess)

[garnet]

Just recheck my numbers:
1st year the interest is 36.7% of the total re-payment.
Interest is 1.84% for 2 years.

Anyway, OP, pay as much as you can as deposit.

[eek]

Just recheck my numbers:
1st year the interest is 36.7% of the total re-payment.
Interest is 1.84% for 2 years.

Anyway, OP, pay as much as you can as deposit.

It's a shame the rates on the loan offered is 2.54% or 2.34%

[WTFH]

It's a shame the rates on the loan offered is 2.54% or 2.34%

Never let the facts get in the way.