If you sell a property after five years, how much do you still owe the bank? The answer is not what you think, especially on a repayment mortgage.
Early in a repayment mortgage, most of your monthly payment goes to interest, not capital. After five years of a 25-year mortgage, you have paid off surprisingly little of the actual loan. On a £150,000 loan at 5.5%, after five years you still owe roughly £127,000. You have made £55,080 in payments but only reduced the loan by £23,000. The rest went to interest.
The formula for outstanding balance looks complex but the principle is simple. As time goes on, more of your payment goes to capital and less to interest. After ten years, you owe roughly £100,000. After 20 years, roughly £58,000.
This matters when you sell. If you bought a property for £200,000 with a £150,000 mortgage and sell after five years for £250,000, your equity is roughly £123,000 (sale price minus outstanding loan). But if prices have dropped to £200,000, your equity is only £73,000 after costs.
Knowing your outstanding balance at any point lets you calculate your true equity and make informed decisions about selling or refinancing.
The formula
Balance(k) = P × ((1 + r)^n - (1 + r)^k) / ((1 + r)^n - 1)
Why this matters
Your outstanding balance drops slowly at first. In the first half of a repayment mortgage, most of your payment goes to interest. Check your redemption statement before you sell.
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