How are mortgage repayments calculated?

On a standard repayment mortgage, every monthly payment is split between two things:

• Capital — the part that actually reduces the amount you owe.
• Interest — the lender’s charge for lending you the money, calculated on the balance you still owe.

The payment is set so that if you make it every month for the full term — say 25 years — the balance reaches exactly zero on the final payment. This process is called amortisation. Because the payment stays level while the balance falls, the split shifts over time: early on you pay mostly interest; later, mostly capital.

An interest-only mortgage works differently — you pay just the interest each month and the balance never falls, so you need a separate plan to repay the capital at the end. The rest of this guide covers repayment mortgages, which are by far the most common in the UK.

Lenders use the standard amortising-loan formula to find the level monthly payment:

M = P × r × (1 + r)ⁿ ÷ [ (1 + r)ⁿ − 1 ]

• M — the monthly payment
• P — the amount borrowed (the principal)
• r — the monthly interest rate (the annual rate ÷ 12)
• n — the total number of monthly payments (years × 12)

Worked example

Take a £250,000 mortgage at 4.5% over 25 years:

• Monthly rate r = 4.5% ÷ 12 = 0.375%
• Number of payments n = 25 × 12 = 300

Put those into the formula and the monthly payment comes out at £1,390. Over the full 25 years that’s £416,874 repaid in total — the original £250,000 plus £166,874 of interest. You can confirm it in seconds with the Mortgage Calculator.

Interest is charged on what you still owe, so when the balance is at its biggest — right at the start — the interest portion is biggest too.

On our £250,000 example at 4.5%, the very first month’s interest is:

£250,000 × (4.5% ÷ 12) = £937.50

So of your first £1,390 payment, £937.50 goes on interest and only £452.50 reduces the balance. By the final years it’s the reverse — almost every pound is capital. This front-loading is why:

• overpaying early has a far bigger effect than overpaying late;
• moving house and starting a fresh 25-year term drops you back into the interest-heavy phase;
• the balance falls slowly at first, then accelerates.

The interest rate is the single biggest lever on cost. Because interest compounds over decades, even a fraction of a percent adds up. Here’s the same £250,000 mortgage over 25 years at different rates:

Going from 4% to 6% adds about £291 a month — and over £87,000 across the full term. That’s why shopping around for the best rate, and keeping your loan-to-value low to unlock better deals, matters so much. See how a change would hit your own payment with the Mortgage Rate Rise Calculator.

The term is how long you take to repay. A longer term spreads the capital over more payments, so each one is smaller — but you pay interest for longer, so the total climbs. The same £250,000 at 4.5%:

Stretching from 25 to 35 years drops the monthly payment by around £207, which can help affordability — but it adds roughly £80,000 in interest. A shorter term does the opposite: higher monthly cost, far less interest overall. The Affordability Calculator can help you find a term that balances the two.

Because interest is charged on the balance, anything extra you pay comes straight off the capital — and saves all the future interest that capital would have racked up. The effect is bigger than most people expect.

On the £250,000 mortgage at 4.5% over 25 years, overpaying just £100 a month:

• clears the mortgage in about 22 years and 2 months instead of 25 — nearly three years early;
• saves around £21,871 in interest.

Overpaying early saves the most, because that capital would otherwise have been charged interest for the longest. Watch for two things first: many fixed-rate deals cap penalty-free overpayments at 10% of the balance a year, and some carry early repayment charges. Model your own numbers with the Mortgage Overpayment Calculator.

The rate in the formula isn’t always fixed for the whole term. In the UK you usually take an initial deal period — commonly two or five years — on one of these:

• Fixed rate — your rate, and so your payment, is locked for the deal period. Predictable, but you normally pay an early repayment charge to leave early.
• Tracker — your rate follows the Bank of England base rate plus a set margin, so the payment moves up and down with it.
• Standard variable rate (SVR) — the lender’s default rate once your deal ends. It’s usually the most expensive, which is why most people remortgage before rolling onto it.

When a deal ends, your payment is recalculated on the remaining balance and term at the new rate — the amortisation clock doesn’t restart, but the numbers change.

The monthly payment isn’t the whole story. A mortgage usually comes with an arrangement (product) fee, often £999–£1,500. You can pay it upfront or add it to the loan — but adding it means you pay interest on the fee for the whole term, so it costs more overall. There may also be valuation and legal fees.

When comparing deals, look at the total cost over the deal period (payments plus fees), not just the headline rate — a low rate with a big fee can beat a higher rate with no fee, or vice versa. The True Cost of Buying a House Calculator pulls the deposit, stamp duty and fees together so you see the full picture.

Five levers reduce the total interest you pay over the life of a mortgage:

1. A bigger deposit / lower LTV — you borrow less and unlock better rate bands. Check yours with the Loan-to-Value Calculator.
2. A lower interest rate — remortgage before you hit the SVR.
3. A shorter term — if you can afford the higher monthly payment.
4. Regular overpayments — even small ones, made early.
5. Avoiding an interest-only balance you have no firm plan to clear.