July 15, 2026
Mortgage Payment Formula Explained: What Goes Into Your Monthly Bill
Break down every component of your mortgage payment — principal, interest, amortisation, and why the same loan can cost very different amounts over time.
Most people know their monthly mortgage payment amount but have no idea how it is calculated. That gap matters because understanding the formula lets you see exactly how different rates, terms, and down payments affect the total cost. not just the monthly number. A £250,000 mortgage at 5% for 25 years costs £195,000 in interest. At 4% for 20 years, that same loan costs £114,000 in interest. The formula behind both numbers is the same; only the inputs differ.
The Mortgage Payment Formula
All standard repayment (capital and interest) mortgages use the same underlying formula. a fixed-payment annuity calculation:
M = P × [r(1+r)ⁿ] ÷ [(1+r)ⁿ − 1]
M = monthly payment
P = loan principal (amount borrowed)
r = monthly interest rate (annual rate ÷ 12)
n = total number of monthly payments (years × 12)
Worked example: £200,000 at 4.5% for 25 years
r = 4.5% ÷ 12 = 0.375% = 0.00375
n = 25 × 12 = 300 payments
M = 200,000 × [0.00375 × (1.00375)³⁰⁰] ÷ [(1.00375)³⁰⁰ − 1]
Monthly payment ≈ £1,111
Total paid: £333,300. Total interest: £133,300.
How Amortisation Works
Every mortgage payment contains two components: interest and principal. But they are not split evenly. In the early years, most of each payment goes to interest. As the outstanding balance falls, the interest portion shrinks and more goes to principal. This is called amortisation.
Payment breakdown on the £200,000, 4.5% example
Month 1: £750 interest + £361 principal
Year 5 (month 60): £689 interest + £422 principal
Year 15 (month 180): £516 interest + £595 principal
Year 25 (month 300): £4 interest + £1,107 principal
This means that overpayments made early in a mortgage save significantly more in total interest than the same overpayments made later. An extra £100/month in year one on this loan saves roughly £18,000 in interest and cuts about 4 years off the term. The same £100/month starting in year 15 saves far less because the remaining balance (and therefore the interest accruing on it) is already much lower.
Rate vs Term: Which Lever Matters More?
£200,000 borrowed — same amount, different terms and rates
4% for 25 years: £1,056/month — total interest: £116,800
4% for 20 years: £1,212/month — total interest: £90,800 (save £26,000)
5% for 25 years: £1,169/month — total interest: £150,700 (cost £33,900 more)
5% for 20 years: £1,320/month — total interest: £116,800
Shortening the term from 25 to 20 years at the same rate saves more interest than reducing the rate by 1% over the same term. If you can afford the higher monthly payment, a shorter term is often the more valuable choice. though only if the savings account for your emergency fund and life flexibility.
Fixed vs Variable Rate Mortgages
The formula above assumes a fixed interest rate for the full term. Most UK mortgages are fixed for an initial period (typically 2 or 5 years) and then revert to the lender's standard variable rate (SVR) unless remortgaged. An SVR is typically 2–3% above the base rate. significantly higher than available fixed deals. The practical implication: model your mortgage using the fixed rate for the fixed period, then remodel at the likely prevailing rate when the fix ends.
Variable rate mortgages (trackers and discounts) follow the Bank of England base rate. When rates fall, your payment falls automatically. When rates rise, so does your payment. The formula is recalculated each time the rate changes based on the outstanding balance and remaining term at that point.
Beyond the Formula: Costs Often Overlooked
- Stamp Duty: A one-time tax on purchase. Rates vary by property price, buyer type, and location (England/Scotland/Wales have different rules).
- Arrangement fees: Lenders often charge £999–£2,000 to set up a mortgage. Adding this to the loan means you pay interest on it for the full term.
- Buildings insurance: Required by lenders. typically £150–£400/year.
- Service charges and ground rent: Leasehold properties add ongoing costs not captured in the mortgage payment.
Source: FCA. Consumer Mortgage Guide · MoneyHelper. Mortgage Calculator
Using the Calculator
Enter your loan amount, interest rate, and term into the mortgage calculator to see your monthly payment, total interest, and a year-by-year amortisation schedule. Try different rate and term combinations to see exactly how the numbers shift. The rent vs buy calculator lets you compare the full cost of buying (including mortgage interest, fees, and opportunity cost) against renting over the same period.
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