The mortgage is one of the most common financial products. Fortunately or unfortunately, almost all of us will have to face one or more throughout our lives. This loan has its ‘tip’ in the form of interest. If the value of the apartment amounts, for example, to 120,000 euros, the interest will always increase its price. Its calculation depends on several factors, as you can see if you continue reading the following post.
How is the interest on a mortgage calculated? The first thing you have to know is that there are three types of mortgages, differentiated by the form of the interest rate: fixed, variable or mixed. Depending on the type of mortgage we sign, the interest rate will vary. As we will see below, the Euribor has a lot to do with this entire account. Let us now see how it influences, whether it is a fixed mortgage or a variable one.
The calculation of a fee is always divided into two parts: the one destined to repay the entire loan and the other dedicated to paying the interest on the mortgage, obtained from the amount that remains pending payment. Next, we will see examples of its calculation, depending on the type of mortgage you have contracted.
How to calculate the interest of a fixed mortgage?
In this case, the mortgage payment will always be the same throughout all time. If we have a 2% fixed-rate mortgage of 200,000 euros over 25 years. In this case, the monthly fee would amount to 1,011.77 euros/month. The fee will always be the same, but the interest on the mortgage will be higher at first and then will decrease until the payment is completed. To calculate the necessary interest rate we will have to do a special calculation:
Amount pending amortization x interest rate/12:
- Calculation of the first installment: 200,000×0.02/12= 333.33 euros of interest.
- Calculation of the second installment: 198,988.23×0.02/12= 331.65 euros of interest.
- Calculation of the third installment: 197,976.46×0.02/12= 329.96 euros of interest.
So up to 300 installments.
Logically, from this calculation, with a simple subtraction we know how to obtain the amortization fee of 678.44 euros in the first installment. In the case of the second, it would amount to 680.12 euros, while in the third; we would speak of 681.73 euros.
How is a variable rate mortgage calculated with interest?
In the case of a variable mortgage, the Euribor is what determines the evolution of said monthly payment. That is, the European reference indicator to calculate the rate of money. Remember when this word was always everywhere? Yes, it was in the worst years of the economic crisis back in 2011 and 2012. The rate exceeded 5% and had a great impact on the price of mortgages. Currently, the rate has even dropped to negative ground, making mortgages much cheaper. Right now, it is a good time to sign variable mortgages, although banks have their strategies, such as the floor clause or the ceiling clause.
The way to calculate it is the same. However, the interest rate will change depending on the Euribor, so we will have to be careful. In the event that the mortgage is variable, the calculations will be adapted according to the conditions. It is usual that the first or second year the conditions are fixed, becoming variable thereafter with an annual or semi-annual review. The interest to be paid will depend on how the Euribor is at the time of the review.
The amortization table and early amortization
If you don’t want to take out the calculator, you can get the amortization table from your bank. It is the same as we have calculated before, but in a more direct way. You should also assess the capacity of early repayment. It supposes a formula where the mortgagee advances a part of the loan in advance. Consequently, your debt is reduced and you will have two options:
- You can reduce the term: in that case, you will finish paying the mortgage sooner and logically, by applying on less capital, you will face the payment of less interest.
- You can reduce the fee, even if the term of the mortgage is the same.
Now that you know how to calculate the interest on a mortgage, go to the Housell blog and learn more about the real estate market. Or you can access our mortgage calculator tool and find the one that best suits your needs.
