Variations of Interest Only Mortgage Repayments

Hi Brains Trust,

Quick question as I just need to try and bounce my thought process off something other than myself -

On an interest only mortgage, I'm told by the bank this amount is the 'estimated repayment amount' but may vary due to circumstances etc.

I understand interest is charged daily, and if your late on the payments or have a linked offset then that affects the amount the interest is calculated on. This bank charges you interest on the 1st of each month and does a repayment sweep from a linked offset the same day.

For arguments sake, lets say the amount is $1000. The offset account gets $1200 into it 7 days before the repayment is due. At all other times the offset has $0 in it.

My question - in this scenario, would the estimated repayment amount be $1000 most of the time? If there is a variation, would be up to an additional 10-15% of the estimated repayment amount? What would cause such a large difference?

Thanks much in advance!

Comments

  • +2

    Hey OP,

    Interest only payments generally vary due to number of days in the month. E.g. 30 days = lower payment, 31 days = higher payments. I do work for a bank in home loans, so if you do have a more pertinent question or if this doesn't clarify it feel free to just hit me up with a reply, more than happy to assist :).

    Edit: From personal experience, banks will tend to give you a 31 day estimate ignoring offset accounts to attempt to give you an upper limit of the repayment you may be liable for pn Interest Only.

    So of they say an estimated repayment of $1000 per month. They mean $1000 per month, based on a 31 day month and no money in the offset account.

  • +4

    /*
    I am bored as hell
    int only mortgage simulator
    known bugs : probably a lot
    */

    mortgage = 5000000.00
    num_months_of_loan = 360
    curr_month=1
    actual_month = 1
    actual_year = 2016

    while ( curr_month<=num_months_of_loan )
    {
    int_total = 0.0
    curr_day = 1

    daysinyear =days_in_year(actual_year)
    daysinmonth=days_in_month(actual_month,daysinyear)

    while (curr_day<= daysinmonth)
    {
    int_to_pay = ( greatest(mortgage - min(bal in offset for day curr_day),0) ) * int_rate / days_in_year(actual_year)
    mortgage += int_to_pay
    int_total += int_to_pay
    curr_day++
    }
    printf ("you have been charged %d" interest,int_total )
    mortgage -= int_total
    curr_month++
    actual_month++
    if (actual_month >12)
    {
    actual_month=1
    actual_year++
    }
    }
    pay_up_now()

  • +1

    Don't know how your bank calculates the estimated repayment, but the interest payable for each day should be:
    ((amount owing minus balance of offset account) multiplied by (interest rate as a decimal divided by 365))
    Do this calculation for each day of the month and the total should be your interest repayment for the month.

  • +1

    Thanks all!

    For those interested in closure, they didnt do a sweep on the 1st of Jan, meaning there was extra interest in the repayment amount - and $30 short in the offset to pay it. So they just remain silent and not even a message to say "hey, you havent paid your interest yet - here's a reminder".