How to work out the true cost of a mortgage
Last Modified 16th of February 2021
Most people aiming to get on to the property ladder need to arrange a home loan or mortgage. As well as paying additional interest on the money borrowed, people who take out a mortgage must also pay other fees on the loan. If you use the data from the loan and your own personal information, you can easily calculate the true cost of a mortgage independently, or through the help of a price-comparison website.
Fixed rate and variable rate mortgages
There are two different types of loans, and the one you take out will affect how you can calculate the mortgage amount. These two types are fixed rate and variable.
Fixed rate mortgages
It is very easy to calculate how much interest you will have to pay on a fixed rate mortgage. All you have to do is minus the down payment from the original cost of the house. Once you have this answer, simply divide it by the number of payments that you have to make throughout the term of the loan – for example, a 20-year loan will consist of 240 monthly payments. When you have calculated this, multiply the answer you have by the rate of interest. Finally, multiply this answer by the number of payments you will have to make. This number is the amount of interest you will have to pay throughout the life of the loan.
Variable rate mortgages
If you have adjustable mortgage rates, then calculating the amount of interest you will have to pay is a little harder to do. This is because you would need information about interest rates in the future. If you can obtain professional estimates, or if you are using trends over the past two years as a reference, simply use the formula mentioned above to calculate the rate of interest. With this type of mortgage, you will need to allow a little bit of margin for error as it is not possible to accurately predict the rate of interest.
When it comes to calculating the true cost of a mortgage, you will also need to think of the rate of inflation. Inflation occurs when the value of a unit of currency steeply declines. Exactly like the interest on an adjustable rate mortgage, you will only be able to predict the rate of inflation. Speaking to a financial advisor will help you to make a better estimate.
The final thing you will need to consider when you are calculating the cost of a mortgage is the amount of fees you will have to pay. It is important that you factor in these fees when thinking about a mortgage, because they can add up to thousands of pounds and really throw you off if you don’t think about them.
Although it is possible to calculate how much your mortgage will cost on your own, you will not always be able to get a truly accurate answer. The only way that you will be able to get the correct answer is to consult with a lender or financial advisor, who will be able to provide you with accurate figures regarding inflation and the extra fees you will have to pay.