How does the interest rates on a mortgage work?

aparoid89

Active member
146 1
Let's say that the mortgage has interest rate of 5% and you have borrowed £100,000. Does the 5% mortgage rate compound each year or is it just 5% of the total amount borrowed? If the rental yield of the property is 4.9% then does that mean you are losing money on your trade and be better off renting since you have ROI of -0.1%?
 

aparoid89

Active member
146 1
I see a mortgage as leverage and the purchase of the house as a trade just like any other security. I need to know whether this is a better trade than by trend system.
 

new_trader

Legendary member
6,665 1,489
Let's say that the mortgage has interest rate of 5% and you have borrowed £100,000. Does the 5% mortgage rate compound each year or is it just 5% of the total amount borrowed? If the rental yield of the property is 4.9% then does that mean you are losing money on your trade and be better off renting since you have ROI of -0.1%?

Find an online Mortgage Amortization calculator to find out how much interest you pay each year.

I think most banks apply the Rule of 78 for mortgage interest.
 

aparoid89

Active member
146 1
Ok so taking out a loan of $200,000 at 4.5% interest would cost around $134,000. So a rent of 4.4% would be $10560 and over 25 years that would make it 264,000 which would mean a net profit of $130,000. Then you add on the value of the house at 240,000 meaning you get 370,000

Assuming the deposit was 40,000 and is instead invested into my trend following system and my system can return 10% a year while adding the extra 2000 for the rent being cheaper than the mortgage and after 25 years I will have 580,000. And I am protected from any interest rate rises or stock market crashes.
 

Shakone

Senior member
2,458 665
Ok so taking out a loan of $200,000 at 4.5% interest would cost around $134,000. So a rent of 4.4% would be $10560 and over 25 years that would make it 264,000 which would mean a net profit of $130,000. Then you add on the value of the house at 240,000 meaning you get 370,000

Assuming the deposit was 40,000 and is instead invested into my trend following system and my system can return 10% a year while adding the extra 2000 for the rent being cheaper than the mortgage and after 25 years I will have 580,000. And I am protected from any interest rate rises or stock market crashes.

The interest is 134,000, but you also have to pay off the loan itself, so 334,000. So with the rent you quote, you'd have a loss of 70,000 spread over the 25 years. But yes you'd have the house at the end of it.
 

aparoid89

Active member
146 1
Code:
The interest is 134,000, but you also have to pay off the loan itself, so 334,000. So with the rent you quote, you'd have a loss of 70,000 spread over the 25 years. But yes you'd have the house at the end of it.

Oh damn! I forgot about that. That would make it, assuming the house price is the same as before, a gain of only 140,000 not 340,000
 

Jason Rogers

Senior member
2,772 93
I see a mortgage as leverage and the purchase of the house as a trade just like any other security. I need to know whether this is a better trade than by trend system.

Hi Aparoid,

Another factor you may want to consider when comparing real estate to other investment opportunities is whether there are any tax benefits to home ownership where you live. For example, in the US, you can deduct the mortgage interest you pay from your taxes. You may also want to look into how any capital gains would be taxed if you sold the property.

Jason
 
 
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