When you start repaying your mortgage, initially the majority of your loan repayment will be servicing the interest costs, in most cases.
Lets just take a simple example first to illustrate this point:
- Mortgage: €300,000
- Term: 30 years
- Fixed Interest Rate: 3.5%
As you can see from the above table, based on the mortgage terms, the borrower must make monthly repayments of €1,347.13. When you look a little closer, you will see that a whopping €875 of the first mortgage repayment is just to service the interest costs of the loan (which equals 65% of the loan repayment).
Mortgage interest is calculated on the balance outstanding on the loan, this means that the interest you pay will be mostly front-loaded. The more and more repayments that you make, the lower the interest will become and the greater the amount allocated to reduce the principal loan amount.
The offshoot of this is it will be slow to build up equity on your property initially without overpaying on your mortgage.
Depending on the terms of your mortgage it could be years before you reach your mortgage tipping point.
What is the mortgage tipping point?
The tipping point of a mortgage is the point at which 50% or more of the mortgage repayment is allocated against the principal of the loan.
What factors affect when the tipping point of your mortgage?
There are two main factors that affect when your mortgage tipping point is:
– Mortgage Term: The longer the term of your mortgage the longer it will take you to reach the tipping point.
– Interest Rate: The higher the interest rate on your mortgage the longer it will take you to reach the tipping point. This is particularly relevant at the moment with interest rates all over the world increasing at a rapid rate of speed.
The Fed Funds Short Term rate now ranges from 3.75-4.00%, when only back in March of 2022 it was as low as 0.25-0.50%. This is an unprecedented rise in such a short space of time.
The effect is that mortgage borrowers are now facing far more costly repayments on their mortgages and the tipping points are much further into the future.
Matrix of Mortgage Tipping Points
Are you interested in knowing what the tipping point is on your own mortgage? I have prepared a matrix below that covers all of the major
| Interest Rate | 15 Year Term | 20 Year Term | 25 Year Term | 30 Year Term | 35 Year Term |
|---|---|---|---|---|---|
| 2% | Month 0 | Month 0 | Month 0 | Month 0 | Month 5 |
| 2.25% | Month 0 | Month 0 | Month 0 | Month 0 | Month 51 |
| 2.5% | Month 0 | Month 0 | Month 0 | Month 28 | Month 88 |
| 2.75% | Month 0 | Month 0 | Month 0 | Month 59 | Month 119 |
| 3% | Month 0 | Month 0 | Month 23 | Month 84 | Month 144 |
| 3.25% | Month 0 | Month 0 | Month 45 | Month 105 | Month 165 |
| 3.5% | Month 0 | Month 4 | Month 64 | Month 124 | Month 184 |
| 3.75% | Month 0 | Month 19 | Month 79 | Month 139 | Month 199 |
| 4% | Month 0 | Month 33 | Month 93 | Month 153 | Month 213 |
| 4.25% | Month 0 | Month 45 | Month 105 | Month 165 | Month 225 |
| 4.5% | Month 0 | Month 56 | Month 116 | Month 176 | Month 236 |
We can also get a much clearer picture when we plot the above table on a chart.
Why should you care? Analysing items such as the mortgage tipping point should form part of your analysis at the time when you are deciding the terms of your mortgage.
While you may be making a small saving on the monthly repayment by extending the term of the loan, it can hugely increase the length of time for you to build up a decent amount of equity in your home.
Similarly, just a small difference in interest rate can have a huge effect on your overall mortgage cost. Although it may not seem like it, shopping around can save you a fortune.
Mortgage Tipping Point Calculator
If the above stats that I have prepared do not reflect your own personal situation then you can use my mortgage repayment calculator to work out when exactly your own mortgage tipping point is.
If you are a bit of a mathematician, then the formula to calculate the halfway point (tipping point) of your mortgage is:
n = ln((P * r/12) / (A – (P * r/12))) / ln(1 + r/12)
where:
n = number of months to reach the halfway point
P = principal balance (the amount you borrowed)
r = monthly interest rate (annual interest rate divided by 12)
A = monthly mortgage payment
Disclaimer: This blog post is for informational and educational purposes only and should not be construed as financial advice.