Effect of 1% Rate Difference Over Time

08/06/2024 Credit Repair Comments (0)

How a small difference in Interest Rate builds up over time.

Impact of a 1% Interest Rate Difference on a £200,000 Mortgage

Mortgage Details:

Loan Amount: £200,000
Interest Rates: 3% vs. 4%
Loan Terms: 25 years, 30 years, 35 years

Calculations:

1. Mortgage Term: 25 Years

Monthly Payment at 3% Interest: £948.42
Monthly Payment at 4% Interest: £1,055.67
Total Payment at 3% Interest: £948.42 * 300 months = £284,526
Total Payment at 4% Interest: £1,055.67 * 300 months = £316,701
Difference in Total Payment: £316,701 – £284,526 = £32,175

2. Mortgage Term: 30 Years

Monthly Payment at 3% Interest: £843.21
Monthly Payment at 4% Interest: £954.83
Total Payment at 3% Interest: £843.21 * 360 months = £303,555
Total Payment at 4% Interest: £954.83 * 360 months = £343,739
Difference in Total Payment: £343,739 – £303,555 = £40,184

3. Mortgage Term: 35 Years

Monthly Payment at 3% Interest: £770.60
Monthly Payment at 4% Interest: £888.47
Total Payment at 3% Interest: £770.60 * 420 months = £323,652
Total Payment at 4% Interest: £888.47 * 420 months = £373,157
Difference in Total Payment: £373,157 – £323,652 = £49,505

Summary Table:

Loan Term	Monthly Payment at 3%	Monthly Payment at 4%	Total Payment at 3%	Total Payment at 4%	Difference
25 Years	£948.42	£1,055.67	£284,526	£316,701	£32,175
30 Years	£843.21	£954.83	£303,555	£343,739	£40,184
35 Years	£770.60	£888.47	£323,652	£373,157	£49,505

This example illustrates that even a small difference in interest rates can lead to significant savings over the life of a mortgage. A lower interest rate not only reduces your monthly payments but also decreases the total amount of interest paid over the term of the loan.

This can also be shown on a graph – the longer your mortage is for, the more a 1% higher rate will cost you!

Graph of savings on different repayment lifetimes

Key take away: Small amounts make big differences over time!