How UK mortgage payments are calculated

For a capital-and-interest mortgage you need three inputs: how much you borrow, the annual interest rate, and how many years you take to repay. The property price and deposit matter because they set the loan and the loan-to-value (LTV), which affects the rate a lender offers.

A £312,500 purchase with a £62,500 deposit is a £250,000 loan at 80% LTV. Lenders price by LTV band, so a bigger deposit can lower the rate as well as the loan.

Convert the annual rate to a monthly rate r (annual ÷ 12) and the term to months n (years × 12). The level monthly payment is M = P × [r(1+r)^n] ÷ [(1+r)^n − 1], where P is the loan. At 0% it would simply be P ÷ n.

On £250,000 at 4.5% over 25 years, that gives £1,389.58 a month. Lenders may charge interest daily or round differently, so an offer can differ by a few pounds.

In the first month, interest is £250,000 × 4.5% ÷ 12 = £937.50. The other £452.08 of the £1,389.58 payment reduces the loan. Each month the balance is a little lower, so the interest share falls and the capital share rises.

That is why the balance falls slowly at first. After five years you have paid £83,374.80 but still owe £219,644.76; about £53,020 of what you paid was interest. You owe less than half the loan only after almost 16 years.

A longer term lowers the monthly payment but adds a lot of interest. Going from 25 to 35 years on the same loan saves £206.44 a month but costs £80,045.21 more in total interest, if the rate stayed the same throughout.

Lenders also check affordability over the whole term and may cap the term by your age at the end. A longer term can make a payment affordable now; you can usually shorten it later by overpaying or when you remortgage.

A fixed rate stays the same for the deal period, usually two or five years. A tracker moves with the Bank of England’s Bank Rate plus a set margin. A standard variable rate (SVR) is set by the lender and is what many mortgages move to when a deal ends, unless you remortgage or take a new deal.

The rate makes a big difference to the payment. On £250,000 over 25 years, 3.5% is £1,251.56 a month, 4.5% is £1,389.58, 5.5% is £1,535.22 and 6.5% is £1,688.02.

When a fixed deal ends, the new payment is worked out on the balance you still owe over the years left. After five years at 4.5% you would owe £219,644.76. Over the remaining 20 years at 6.5%, the payment would be £1,637.61, about £248 a month more. At 5.5% it would be £1,510.91. The calculator uses one rate for the whole term, so to check a deal ending, enter the remaining balance, the new rate and the years left.

An overpayment goes straight off the balance, so it saves the interest that balance would have built up. Keeping the payment the same and adding £100 a month to the £250,000 example clears the mortgage 2 years and 10 months early and saves £21,870.77 in interest. £200 a month clears it 5 years and 1 month early and saves £38,457.87.

Many fixed and discount deals let you overpay up to a limit, often 10% of the balance a year, without an early repayment charge. Above that limit a charge can apply. Check your mortgage terms or ask your lender before you overpay. Whether to overpay or save instead depends on your rate, your savings rate and whether you have an emergency fund; MoneyHelper has free guidance.

This guide and the calculator are for repayment mortgages. On interest-only, the monthly payment is just the loan × the monthly rate (£937.50 on the example), but the full £250,000 is still owed at the end unless you have a separate plan to repay it. Interest-only is less common for ordinary home purchases and is assessed differently.

Arrangement, valuation and broker fees, buildings insurance, ground rent, service charges and early repayment charges sit outside the formula. Stamp duty is paid when you buy, and Council Tax is a separate bill. Affordability checks also look at your income, other debts and spending, so fitting the payment into your budget is not the same as being offered the loan.

Before committing, line the payment up against your take-home pay, add a Council Tax estimate, and set the stamp duty aside as a cost on completion.