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Instead of taking a single loan of 200 000 at 1.7% over 25 years, I've been proposed to take out two loans:

  • 100 000 at 1.2% over 15 years (loan A),
  • 100 000 at 1.7% over 25 years (loan B)

With the duo loan I would pay back 804.20 monthly over 25 years. For the first 15 years: 607.33 goes towards A, and 196.87 goes toward B. For the last 10 years the 804.20 is paying back principal and interest of loan B.

How did the bank calculate that I should pay 804.20 monthly? Do they have a formula for this? I only figured out it was A's monthly (607.33) + 196.87. The latter is slightly more than the annual interest of loan B. I could not find any correlation between 804 and my monthly salary. It seems quite arbitrary.

  • Yes, there are formulas for this. They are determined by the terms of the loan(s). They have nothing to do with your salary except that if the resulting numbers are to large relative to your salary and savings you won't get the loan. – keshlam Jul 27 '16 at 12:54
  • The keyword to websearch is "amortization". – keshlam Jul 27 '16 at 14:19
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The formulas are rather complex, but the concept is easy - chose the monthly payment so that at the end of the agreed time the mortgages are just exactly paid off.

You can repeat the calculation in Excel, by making one row per month (for the whole 25 years), and in each row you would have the current loan amounts (for both loans), the monthly interest, the payment, and then the new loan amounts (which goes into the next line as starting point). By modifying the monthly payment, you can then see when the loans would be fully paid, and iterative come to the given amount.

For a close formula (where you plug the given data in and it gives you the monthly payment), that is rather complicated to develop, see for example http://www.mtgprofessor.com/formulas.htm. Because you have two stacked loans, your formula would be more complicated, but similar.

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