# Compound Interest



## Gruffs (Dec 10, 2007)

Hi all you accountants.

What i want to know is how i can calculate compound interest so i can show my wife how by over-paying on our mortgage we are "saving" more money than by just saving. I have an idea how to do this but I would like it confimed please if you would be so kind.

Preferably in the form of an excel formula.


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## Avanti (Jan 17, 2006)

IIRC there is a formula already pre loaded in excel, however other factors depend on your mortgage, if you have a standard mortgage then you can over pay what you wish, but other schemes often limit overpayment or subject to penalty.
I paid my mortgage off 7yrs early by over paying when interest rates dropped I kept the payments the same, near the end my payments should have been 1/3 of the original, so I was over paying by 200%, however the game really is about having disposable income and being mortgage free, doesn't always leave that position 

Basically if you divide the annual % interest rate by 12 then multiply this by the balance then that is what you are paying in interest every month.


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## Beancounter (Aug 31, 2006)

Have a look at this link from the MS website, it should help you build up something to show what you're looking for :thumb:


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## Gruffs (Dec 10, 2007)

At the moment, we are able to overpay by £500 per month without incurring penalties. Due to things like only having 1 car, and not spending every penny we earn, we are able to do this. Next month, my car is paid for which gives us even more available.

We 'live' from a joint account and both pay in this. Whatever is left we save/spend/forget about. We tend to spend mine and she saves practically everything she has left. So, we have a 'rainy day fund' and enough to allow her to take a year off when baby is here. So, i think it is time to be over paying. But, to get her out of her 'seeing the savings go up' mindset and into a 'seeing the mortgage come down' mindset, i need to show her cold, hard figures. The mortgage is up for renewal next year so I might even look at offsetting. It's all a bit of a minefield.


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## Avanti (Jan 17, 2006)

Gruffs said:


> At the moment, we are able to overpay by £500 per month without incurring penalties. Due to things like only having 1 car, and not spending every penny we earn, we are able to do this. Next month, my car is paid for which gives us even more available.
> 
> We 'live' from a joint account and both pay in this. Whatever is left we save/spend/forget about. We tend to spend mine and she saves practically everything she has left. So, we have a 'rainy day fund' and enough to allow her to take a year off when baby is here. So, i think it is time to be over paying. But, to get her out of her 'seeing the savings go up' mindset and into a 'seeing the mortgage come down' mindset, i need to show her cold, hard figures. The mortgage is up for renewal next year so I might even look at offsetting. It's all a bit of a minefield.


Depends on the remaining principal really, if say you owe £150k, then £6k off is not a lot (but every little helps) , if you owe say £20k then over pay :thumb:


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## Beancounter (Aug 31, 2006)

Re thinking about mortgages, different mortgages suit different people. I'm personally a fan of an offset mortgage as it enables me, should the worst come to the worst, to get my hands on some money pdq, but also enjoy the benefits of lower interest payments and seeing a direct benefit when i overpay.

You have to be diligent though (which seems you are). We settle the mortgage interest and also overpay into a separate offset account each month.
This might be a good solution for Mrs Gruffs as you can see the savings increase, and also the effect of borrowing less, hence the monthly interest charge going down :thumb:


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## Gruffs (Dec 10, 2007)

By offsetting, we could have the savings and save some interest though couldn't we?

so every £500 we over pay is £500 we don't pay interest on for the entire term.

So:

500(1-0.0399)^30 = £1617.03 :doublesho:doublesho:doublesho

That doesn't seem right somehow.


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## Avanti (Jan 17, 2006)

Gruffs said:


> By offsetting, we could have the savings and save some interest though couldn't we?
> 
> so every £500 we over pay is £500 we don't pay interest on for the entire term.
> 
> ...


That could be right, my mortgage payments would have equated to £90k but by overpaying and settling early I saved £8-25K over the term :thumb:


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## Gruffs (Dec 10, 2007)

So, lets take your average car loan then.

£300 pm over 3 years?

If you keep your car an extra year before getting a new one and overpaying that £300 on your mortgage.

That works out at £11642 @ 3.99% over a 30 year term.

Mental!

the £500pm overpayment for a year is £19404!!!! And, I can always take it back again (@ £500pm) as my mortgage allows this.

This has been really helpful thanks.

I knew we would be making our money work better for us but i didn't know by how much.


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## Beancounter (Aug 31, 2006)

Gruffs said:


> So, lets take your average car loan then.
> 
> £300 pm over 3 years?
> 
> ...


Correct, that's why if you can afford to do it, no matter how big/small, overpaying against your mortgage is a sensible option. :thumb:


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## ant_s (Jan 29, 2009)

I defo need to read this thread again when I'm more awake lol, I've always said soon as the house if finished I'd like to start overpaying our mortgage too, so it will be good to see the figures.


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## bigslippy (Sep 19, 2010)

Gruffs said:


> So, lets take your average car loan then.
> 
> £300 pm over 3 years?
> 
> ...


Holas , is your mortgage over 30 years and who is your current lender , Nationwide?


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## Gruffs (Dec 10, 2007)

30 years and Nationwide.

That is correct.


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## R26Andy (Apr 21, 2011)

This: https://mortgages.hsbc.co.uk/overpayment-calculator is the daddy and persuaded me to overpay rather than stuff it into a bank account.

Andy


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## Tricky Red (Mar 3, 2007)

Gruffs said:


> 30 years and Nationwide.
> 
> That is correct.


I would remortgage and reduce your term. Then overpay and see the savings.

On a 25 year mortgage barely any capital is repaid as standard in the first 5 years. On a 30 year mortgage that means little capital is repaid in the 1st 10 years. Save 10 years straight away by reducing your term and you will save massively.


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