How much interest will I pay in total on my mortgage?

How much interest will I pay in total on my mortgage?

We recently published an article on what impact higher interest rates will have on your mortgage repayment. The conclusion of that article was always going to be that the more you borrowed to buy your house and the lower your original interest rate was, the greater impact will be on your monthly mortgage payment now that they are on the rise.

The natural follow-on to that article is to consider just what the total cost of borrowing will be at various levels of borrowing and a range of higher interest rates.

Real-world examples of the impact of increased interest rates on the total cost of borrowing.

Example 1: You took out a 28-year repayment mortgage for £455,000 with a fixed interest of 1.35% for 5 years.

In this case, if you were able to fix the mortgage rate for the entire 28-year period, the total interest you will have paid for the house will have been just short of £92,000.

However, you didn’t fix the mortgage for 28 years, you only fixed your mortgage rate for 5 years. So, by the time your 5-year fixed-rate deal ends, there will be 23 years left to run and an approximate balance of £388,000. In this example, the table below shows what the total interest paid will be at a range of interest rates.

Interest Rate	Total Interest Paid	Extra above 1.35%
1.35%	£63,500	£0
2%	£96,300	£32,800
3%	£149,600	£86,100
4%	£206,000	£142,500
5%	£265,600	£202,100
6%	£328,250	£264,750
7%	£393,600	£330,100
8%	£461,700	£398,200
9%	£532,000	£468,500

Total interest paid on a £388k mortgage over 23 years.

As you can see, every percentage point increase in the mortgage rate brings with it an additional total cost of borrowing of at least £50,000 and at 9%, the additional cost of borrowing is in excess of £70,000 when compared to an 8% mortgage. This means the cost of borrowing will be nearly half a million pounds more expensive over the 23 years of the mortgage than the existing loan at 1.35% would have been.

Typically, those able to borrow this amount will likely be higher-rate or additional-rate taxpayers and the result is that a mortgage of 9% over 23 years will cost in the region of £1million gross salary extra to cover the extra mortgage interest. This is money that could have otherwise gone into a pension, savings or other investments to provide an income in retirement.

Given this information, it may be prudent for the mortgage borrower to consider overpaying their mortgage as much as possible whilst they are still fixed at 1.35% before any higher interest rates kick in.

How much will I save on my mortgage if I overpay?

For example, if we consider that their next mortgage may potentially be at 6%, the following figures will apply:

Mortgage loan	Total interest paid	Saving
£388,000	£328,250	£0
£375,000	£317,250	£11,000
£350,000	£296,000	£32,250
£325,000	£275,000	£53,250
£300,000	£253,800	£74,450
£275,000	£232,650	£95,600
£250,000	£211,500	£116,750

Total interest paid on a 6% mortgage over 23 years.

Looking at the figures, for every £25,000 the mortgage holder is able to reduce their mortgage by, they will save approximately £21,000 in interest over a 23-year period (providing they are fixed at 6% over 23 years).

Example 2: You took out a 20-year repayment mortgage for £250,000 with a fixed interest of 2.1% for 2 years.

By the time your 2-year fixed-rate deal ends, there will be 18 years left to run and an approximate balance of £229,000. Even though the mortgage loan is substantially less in this example and the original interest rate was not as low, a substantial increase in mortgage interest rates has the potential to add nearly £200,000 to the overall cost of borrowing over the long term. Indeed, an interest rate increase from 2.1% to 6% will add nearly £100,000 to the overall cost of borrowing over just 18 years.

Interest Rate	Total Interest Paid	Extra above 2.1%
2.10%	£46,200	£0
3%	£67,600	£21,400
4%	£92,600	£46,400
5%	£118,750	£72,550
6%	£146,000	£99,800
7%	£174,370	£128,170
8%	£203,800	£157,600
9%	£234,200	£188,000

Total interest paid on a £229k mortgage over 18 years.

By looking at the figures, it’s clear that even a small increase in interest rate to 3% adds over £21,000 to the total interest paid over the next 18 years. The figures show that for every percentage point increase in interest rate, the total interest paid over the life of the mortgage increases by £25,000 at the lower end and over £30,000 once 9% is reached.

How much will I save on my mortgage if I borrow less?

Again, it may be prudent to consider over-paying on the mortgage before the rate increases and the following impact can be observed:

Mortgage loan	Total interest paid	Saving
£229,000	£146,000	£0
£225,000	£143,450	£2,550
£200,000	£127,500	£18,500
£175,000	£111,500	£34,500
£150,000	£95,600	£50,400
£125,000	£79,700	£66,300
£100,000	£63,750	£82,250

Total interest paid on a 6% mortgage over 18 years.

Again, the figures aren’t quite as dramatic as with the first example, however, it’s clear to see that for every £25,000 the borrower is able to reduce their loan by, they will save themselves around £16,000 over the term of the mortgage.

Conclusion.

Interest rates are currently rising, but at some point, the Bank of England will realise that they are at unsustainable levels and bring them down again. Where will they level out though? Will 3% mortgages be the norm or will they be more like 5% over the longer term? Whatever happens, it’s unlikely that they will return to the historic lows we have been used to in recent years. So, what can be done to mitigate their increase?

Firstly, the less money you borrow, the less interest you will pay. So, it may be wise to overpay on your mortgage where this aligns with the rest of your financial goals. Equally, if you have money that is invested, ask yourself if the return you are seeing is substantial enough to beat the interest savings you make by paying down your mortgage and paying less interest.

Finally, nobody has a crystal ball and only you can decide at the time of re-mortgaging as to whether you want to fix your rate for security or perhaps you feel that the interest rate is going to fall and you want to sit on a variable or tracker rate until they fall to a level you are happy to fix on. Either way, I think it’s fair to say that anyone that has bought their dream home on a 30-year mortgage at 2% or below has likely got themselves the bargain of the century!

In essence, to get the best value from a mortgage, you want to borrow the least amount of money at the lowest interest rate and for the shortest period of time possible. Deviate from this and it is going to cost you substantially more over the long term.

What’s next?

We used an online mortgage calculator to prepare these figures, so feel free to jump over there and play around with your own figures. Note though that we are not responsible for external content.

If you are now in the position whereby you need to re-mortgage, need help or advice on your current mortgage, personal or business finances or if you want to consider investing to make your money work harder, you can get in touch with one of our advisors for independent financial advice. We offer a free initial consultation and although we are based in Tunbridge Wells, we advise clients across the UK.

Don’t forget, this article offers information about mortgages and property and should not be taken as personal advice. Think carefully before securing debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.