The monthly payment is one line of arithmetic. The part worth understanding is where it goes, because for the first decade it mostly is not going to the loan.
The formula, worked
Take £250,000 over 25 years at 5.5%.
The monthly rate r is 0.055 ÷ 12 = 0.0045833. The number of payments n is 25 × 12 = 300.
Compute (1 + r)^n first: 1.0045833^300 ≈ 3.9377. Then M = 250000 × (0.0045833 × 3.9377) ÷ (3.9377 − 1) = 250000 × 0.018045 ÷ 2.9377 ≈ £1,535.
Total paid over the term is £1,535 × 300 = £460,500, of which £210,500 is interest. You buy the house and then buy most of it again. That second number is the one worth looking at, and it is the one lenders quote last.
Why the early years are almost all interest
Interest each month is charged on the outstanding balance. At the start the balance is at its maximum, so the interest portion is at its maximum too.
On the example above, the first payment breaks down as £1,146 interest and £389 principal. Three quarters of it does not touch the debt.
| Year | Interest that year | Principal that year | Balance left |
|---|---|---|---|
| 1 | £13,660 | £4,760 | £245,240 |
| 5 | £12,530 | £5,890 | £223,600 |
| 10 | £10,780 | £7,640 | £188,300 |
| 15 | £8,460 | £9,960 | £139,300 |
| 20 | £5,430 | £12,990 | £75,300 |
| 25 | £1,470 | £16,950 | £0 |
Figures rounded. The crossover — where more of the payment goes to principal than to interest — happens around year 14 on a 25-year term at this rate. On a 30-year term at a higher rate it can be past the halfway point.
What an overpayment actually does
This is the practical consequence of the table above, and it is larger than most people expect.
An overpayment comes off the principal directly. That reduces the balance, which reduces every future interest charge, which means more of every subsequent payment goes to principal. The effect compounds.
On the £250,000 example, £100 a month extra from the start clears the mortgage about 3 years 4 months early and saves roughly £31,000 in interest. The £100 is doing far more work than it appears to.
Overpayments are worth most at the beginning, for exactly the reason the early payments are mostly interest — there is more interest to prevent. An overpayment in year 22 saves very little. Check for early repayment charges first; many fixed-rate deals cap overpayments at 10% of the balance a year.
Term versus rate
Two levers, and they do not behave the same way.
Extending the term lowers the monthly payment and raises the total substantially, because you are paying interest for longer on a balance that falls more slowly. Reducing the rate lowers both.
| £250,000 at 5.5% | Monthly | Total interest |
|---|---|---|
| 20 years | £1,720 | £162,800 |
| 25 years | £1,535 | £210,500 |
| 30 years | £1,420 | £261,200 |
| 35 years | £1,340 | £312,800 |
Between 25 and 35 years the monthly payment falls by £195 and the total rises by £102,000. That is the trade in plain figures, and it is the one an affordability calculator obscures by only showing you the monthly number.
How much can you actually borrow
Lenders work from income multiples and affordability testing, and the two give different answers.
A common starting point is 4 to 4.5 times income, occasionally more. But affordability testing then checks the payment against your actual outgoings at a stressed interest rate — typically 1 to 3 percentage points above the offer — to see whether you could still pay if rates rose.
The practical implication is that reducing outgoings can matter more than earning more. Clearing a car loan removes both the payment and the commitment from the calculation, and can move the borrowing figure by more than a modest pay rise would.
Car loans and personal loans
The same formula applies to any amortising loan, and the differences are in the terms rather than the maths.
A car loan is secured on the car, so rates are lower — but the lender can repossess, and on a PCP the final balloon payment means the monthly figure is not comparable to a straightforward loan. A personal loan is unsecured, so rates are higher and nothing is at risk beyond your credit.
Compare on total cost over the period you will actually hold the debt, not on the monthly payment. The Loan Calculator shows total interest alongside the monthly figure, which is the comparison the advertising avoids making. The rate-versus-APR distinction is in APR vs interest rate.
Frequently asked questions
What is the mortgage payment formula?
M = P × [r(1+r)^n] / [(1+r)^n − 1], where P is the principal, r is the monthly rate (annual divided by 12), and n is the total number of payments. For £250,000 over 25 years at 5.5% that gives about £1,535 a month.
Why is my payment mostly interest at the start?
Because interest is charged on the outstanding balance, which is at its highest on day one. On a £250,000 mortgage at 5.5%, the first payment is about £1,146 interest and £389 principal. The crossover point is around year 14 of a 25-year term.
How much does overpaying save?
More than it looks. £100 a month extra on a £250,000 mortgage at 5.5% clears it about 3 years 4 months early and saves roughly £31,000 in interest, because each overpayment reduces every future interest charge. Check for early repayment charges first.
Is a longer term cheaper?
Monthly yes, overall no, and the gap is large. Going from 25 to 35 years on £250,000 at 5.5% lowers the payment by £195 and raises total interest by about £102,000. Affordability calculators show you the monthly figure and not that one.
How much can I borrow?
Typically 4 to 4.5 times income as a starting point, then affordability testing against your outgoings at a stressed rate 1 to 3 points above the offer. Clearing an existing loan can move the figure more than a modest pay rise, since it removes both the payment and the commitment.
Does the same maths apply to a car loan?
Yes, for any amortising loan. The differences are in the terms — a car loan is secured so the rate is lower but the car is at risk, and a PCP has a balloon payment that makes its monthly figure not comparable. Compare on total cost, not monthly.