How mortgage repayments are worked out
Why the early years of a repayment mortgage are mostly interest, and how a 5% rate becomes £1,169.18 a month on £200,000.
What the payment is actually doing
These figures are estimates, not a mortgage offer and not financial advice. Each month the lender charges interest on the balance that is still outstanding, and the rest of the payment comes off the capital. Early on, the balance is large, so most of a repayment mortgage is interest. Later the balance is smaller, the interest shrinks, and more of the same payment clears the capital. That is why an overpayment in year two saves more interest than the same overpayment in year twenty.
The annual rate, divided by twelve
UK mortgage rates are quoted as a nominal annual rate. The monthly rate used here is that number divided by 12. It is not the conversion used for an APR. On £200,000 over 25 years at 5%, the monthly rate is 0.05 / 12 and the repayment that clears the loan is £1,169.18. Across 300 months the interest comes to about £150,754.
The mortgage calculator uses that method and rounds each month’s interest to the nearest penny. A lender’s own schedule can differ by pennies, and by more than that if they charge interest daily. The last payment clears whatever is left, so it need not match the others exactly.
Interest only
Interest only, on the same £200,000 at 5%, is £833.33 a month. Nothing comes off the £200,000 unless you pay extra. At the end of the 25 years the capital is still due. The month is cheaper. The later bill is the loan itself.
When the cheap rate is only for the first few years
A five-year fix does not mean the payment was calculated over five years. The usual approach, and the one the calculator uses, is to set the payment as if the fixed rate lasted the whole term, then recalculate when the fix ends, on the balance that is left and the years still to run, at the follow-on rate. A low payment in year one can jump. Read the follow-on rate before you treat two deals as equal.
A lump sum is taken off before the first month. A regular overpayment is added on top of the contractual payment, which shortens the term rather than cutting the required payment. Both are optional on the calculator.
How much, roughly, and what this is not
Many lenders will consider something around 4 to 4.5 times gross income, and plenty of applications sit outside that. It is a rough guide to what the market commonly offers, not a rule and not an entitlement. Stamp duty in England and Northern Ireland, the survey and the product fees are all on top of the repayment.
None of this is a mortgage offer or financial advice. The calculator does the arithmetic. A lender decides whether to lend, and on what rate. A personal loan or a car loan is priced from an APR, which is a different conversion: that is the loan calculator.