How mortgage payments work

A repayment mortgage spreads the loan over many years. Each regular payment covers interest on the remaining balance plus a slice of principal. Early payments are mostly interest; later payments chip away more principal. That pattern is called amortisation.

The payment formula

For a fixed annual rate r (as a decimal), n payments per year, and N total payments, the level payment M on principal P is:

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

Our Mortgage calculator applies this standard annuity formula. It assumes a fixed rate and equal payments — variable rates, interest-only periods, and fees are not modelled.

Worked example

Borrow £200,000 at 4.5% annual interest for 25 years (300 monthly payments). Monthly rate = 0.045 ÷ 12 = 0.00375. Plugging into the formula gives a payment of roughly £1,112 per month. Total paid ≈ £333,600, of which about £133,600 is interest over the life of the loan.

What changes the payment

• Higher rate: Payment rises nonlinearly because interest compounds on a larger share early on.
• Longer term: Lower regular payment but more total interest.
• Extra principal: Overpayments reduce balance faster; none of our basic tools model this unless you re-run with a lower principal.

What this tool does not include

Property tax, insurance, homeowners association fees (or similar), arrangement fees, and stamp duty sit outside the pure loan maths. Compare offers using the lender’s APR where available.

FAQs

Why is my first year mostly interest?

Interest is charged on the outstanding balance, which is highest at the start.

Fixed vs variable?

This guide covers fixed-rate amortisation. Variable rates change the payment when the rate resets.

Can I trust this for budgeting?

Use it for approximate figures; confirm with your lender’s illustration.

Sources

Standard loan amortisation (annuity) mathematics; FCA mortgage illustration concepts for UK readers.