How is a mortgage repayment worked out?
On a repayment (capital and interest) mortgage, each monthly payment covers the interest for that month and pays off some of the loan. Early on most of the payment is interest; later, more goes towards the balance. If every payment is made, the balance reaches zero at the end of the term. On an interest-only mortgage you pay just the interest, so the amount borrowed is unchanged and has to be repaid some other way when the term ends.
The repayment figure depends on three things: the amount borrowed, the interest rate and the term. This calculator uses the standard amortisation formula with a fixed annual rate converted to a monthly rate.
Worked example: £200,000 at 5% over 25 years
- Repayment: £1,169 a month, total repaid about £350,754, of which about £150,754 is interest.
- Interest-only on the same loan: £833 a month, and the full £200,000 is still owed at the end.
- Over 20 years the repayment rises to about £1,320 a month but total interest falls to about £116,779. Over 30 years it drops to about £1,074 a month.
Assumes the rate stays fixed for the whole term and there are no fees or overpayments.
What happens if interest rates go up?
Many people are on a fixed rate for a few years and then move to a new rate. The calculator's rate comparison shows your payment at the current rate and at 0.5, 1 and 2 percentage points higher. For the example above:
| Rate | Monthly payment | Change |
|---|---|---|
| 5.0% | £1,169 | - |
| 5.5% | £1,228 | +£59 |
| 6.0% | £1,289 | +£119 |
| 7.0% | £1,414 | +£244 |
How does the term affect the cost?
A longer term lowers the monthly payment but means interest is charged on a larger balance for longer, so the total interest is higher. A shorter term does the opposite. Lenders also apply an upper limit on the term, often linked to the borrower's age at the end.
Is interest-only cheaper?
The monthly payment is lower because none of it reduces the loan, but you still owe the whole amount at the end, and lenders usually want to see a credible plan for repaying it. Some borrowers use a part repayment, part interest-only split, which this calculator does not model.
Things this figure does not include
- Arrangement or product fees, unless you add them to the loan amount.
- Buildings insurance, life cover, service charges or ground rent.
- Changes in rate after an introductory or fixed period ends.
To see how paying extra each month changes things, use the overpayment calculator. To check how much a lender might consider lending against your income, try the mortgage affordability calculator. This is general information, not advice.