How mortgage repayments are calculated
A repayment mortgage is an amortising loan: each monthly payment covers the interest on the remaining balance and then pays down some of the capital. The monthly payment is a fixed amount derived from the standard annuity formula — M = P × r(1+r)n / ((1+r)n − 1) where P is the principal, r is the monthly rate, and n is the total number of payments.
The split between interest and capital shifts over time. In the early years, the balance is high so most of each payment goes on interest and only a small slice chips at the capital. As the balance falls, the interest component shrinks and the capital component grows — by the final year, almost every payment is principal repayment. This is why overpayments made early in the term are so powerful: they remove interest from every remaining year of the loan.
A £200,000 mortgage at 4.5% over 25 years has a monthly payment of roughly £1,112. Of the first payment, about £750 is interest and £362 is capital. By year 15, the split is closer to 50/50. In year 25, almost the entire payment repays principal. Total interest paid over the full term is about £133,000 — more than half the original loan.
Repayment vs interest-only
On an interest-only mortgage, each payment covers only the interest on the balance — the capital never reduces, so you still owe the full original amount at the end of the term. Interest-only monthly payments are roughly 30–50% lower than repayment payments, but you need a credible plan to clear the capital: savings, investments (like an ISA portfolio), inheritance, or selling the property.
Most residential mortgages in the UK are repayment — lenders generally require an interest-only plan to be backed by a clear repayment strategy and often only offer it at lower loan-to-value ratios. Interest-only remains common in buy-to-let, where landlords cover interest from rent and plan to clear the capital by selling the property.
How interest rates affect your payments
Mortgage payments are very sensitive to interest rate changes. On the same £200,000 / 25-year mortgage, a 1 percentage-point move in the rate shifts the monthly payment by around £115:
| Interest rate | Monthly payment | Total interest (25 years) |
|---|---|---|
| 3.5% | £1,001 | £100,446 |
| 4.5% | £1,112 | £133,492 |
| 5.5% | £1,228 | £168,527 |
| 6.5% | £1,350 | £205,088 |
When comparing fixed-rate deals, don't just look at the headline rate — factor in the arrangement fee (often £999–£1,495) and how long the rate is locked. A 2-year fix at a lower rate may cost less headline but leaves you exposed to remortgaging into an unknown rate environment sooner.