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How Do Mortgage Payments Work?

There are lots of mortgage calculators available that will tell you how much you should expect your mortgage payments to be. But, do you know why you are repaying that amount? How much of your monthly payment actually goes towards repaying your mortgage? How much is just paying off the interest?

Understanding how mortgage repayments work will help you figure out how much of your home you own in real terms, and how much of your original loan you’ve repaid.

Customise the examples for your mortgage:

Please enter a mortgage amount
Please enter an interest rate
Please enter the full payment term

How mortage payments DON'T work

The simplest way to structure payments would be to repay the same amount each month, and pay interest on the remaining outstanding mortgage. If this were the case, a 30 year mortgage of £100,000 at a 3% annual interest rate, would have repayments of £3,333 per year plus 3% of the remaining amount.

This is not how mortgage payments are structured. Using this method, payments would be highest right when you move in and decrease over time. As salaries tend to go up as people get older, having your repayments start high and decrease over time would make mortgages much less affordable. Instead, mortgage payments are structured to stay constant (assuming interest rates don’t change).

How mortage payments actually work

If you have a repayment mortgage, your monthly payments are calculated using this funky formula:

Which results in...

Your monthly mortgage cost:


Annually, this is:


Each month, part of your payment is used towards the interest on the outstanding mortgage, whilst the rest is used to repay the original loan. To begin with, a lot of your monthly payment goes towards paying the interest. Later on, a larger proportion of the payment goes towards repaying the mortgage instead. So, if you think of your mortgage as a way of buying more of your house from the bank, to start with you’re actually hardly buying anything!

How much of my mortgage have I paid off?

It’s useful to know how much of your mortgage is still outstanding, particularly if you’re looking to sell before the end of your loan term. The amount of the original loan you’ve paid off will affect how much cash you’ll get once you sell.

When you’re half-way through your mortgage term, you’ve not paid off half your mortgage. As initial repayments are mainly used to pay interest rather than repaying your loan, you can be ⅔ - or more - of the way through your loan term before you’ve paid off half of your mortgage. The exact amount depends on the mortgage interest rate. Try changing the interest rate below to see the effect on how long it will take to repay half your mortgage.

Wow, this is complicated...

Agreed - and so far we’ve actually simplified things!

Interest rates are unlikely to remain constant throughout your mortgage term. Typically your monthly repayments will change in line with the Bank of England’s rate.

This chart shows how interest rates affect your monthly payment.

Whilst an interest rate of 15% might seem impossible, the official Bank of England interest rate did hit 14.875% at the end of 1989.

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