The amount of the monthly instalment that will apply when the loan is first arranged will, of course, depend partly on the interest rate prevailing at that time.


Monthly repayments on a £10,000 mortgage:

Interest rate 20-year term 25-year term 30-year term

12% £111.60 £106.30 £103.50

15% £133.20 £129.00 £127.00

Two points to notice in the above example are that the size of the monthly repayments increases less than proportionately to the rise in interest rates; this is because the amount of capital repayment in total must be a constant. In the above example an interest rate of 15%, which is precisely 25% higher than 12%, results in the repayments being only 19.4% higher (20-year term) or 21.4% higher (25-year term) or 22.8% higher (30-year term). Secondly, monthly instalments on a 25-year term are significantly lower than on a 20-year term, but those on a 30-year term are not much lower than on a 25-year term.

The monthly instalment consists partly of interest and partly of capital repayment. Since the amount of the debt is being reduced continuously, whereas the amount of the monthly instalment remains unchanged, it follows that the early instalments consist very largely of interest, with very little capital repayment; whereas the later instalments will consist mostly of capital repayment, the interest element having fallen since the debt will have been reduced.

As a very rough guide to the cost of servicing a repayment mortgage you may notice that, at an interest rate of 12.5%, the monthly gross repayment before tax relief on a 25-year mortgage is about £10 per £1,000 mortgage.

Effect of tax relief

The fact that a repayment mortgage is a reducing debt is particularly relevant when considering the effect of tax relief on the cost of your mortgage payments. Relief is allowable only on the interest element, not on the capital repayment. In the second example above, with a mortgage of 00,000 over a 25-year period for instance, the initial amount of monthly interest at 15% is (£10,000 x 15) = (100 x 12), or £125, out of the total instalment of £129. With tax relief at basic rate of 30% the real cost of each month's instalment in the first year is thus £129 - £307.50, which is £91.50. But in the 25th year, when the borrowing will have been reduced to only a few hundred pounds, nearly all the monthly repayments will consist of capital, so the tax relief will be almost nil.

The value of tax relief with a repayment mortgage is greatest in the early years, falling progressively throughout the term.

Tax Relief on Mortgages

Interest paid in any tax year on a loan for the purpose of buying, improving, or extending one's home, from whatever source the loan is obtained, is allowable as a deduction from total income before assessment to income tax. The effect of this is to give relief at the top rate of tax paid (`marginal' rate) on the amount of interest paid on house mortgages.

There are certain limitations to this relief. First, it is restricted (up to 2000/81) to interest on a total borrowing of £25,000, no relief being available on interest paid on borrowing over this limit. Second, it is available only on the... see: Tax Relief on Mortgages

Personal And Business Finance 2018

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