Mortgage repayments are calculated with an amortisation formula that spreads the loan and its interest into equal monthly payments over the term. It uses three inputs: the amount borrowed, the monthly interest rate and the number of months. A £200,000 repayment mortgage at 4.5% over 25 years works out at about £1,111.66 a month.
Knowing how the number is built helps you see what really changes your payment: the rate, the term, the deposit, and whether you're paying off the loan or just the interest. This guide shows the formula step by step, compares repayment and interest-only mortgages, explains loan-to-value bands, and shows what overpayments and early repayment charges do. It's an explanation of the maths, not financial advice. For a recommendation on your situation, speak to an FCA-authorised mortgage adviser.
Try your own numbers in our free mortgage calculator, which shows the monthly payment, total interest and how overpayments change the term.
Key takeaways
- Monthly repayments come from the amortisation formula, which uses the loan amount, the monthly interest rate and the number of months.
- A £200,000 repayment mortgage at 4.5% over 25 years costs about £1,111.66 a month; interest-only would be £750 a month but the £200,000 is still owed at the end.
- Early payments are mostly interest, so overpaying early in the term saves the most.
- FCA rules say early repayment charges must be a reasonable pre-estimate of the lender's costs, and most fixed deals cap penalty-free overpayments.
How are mortgage repayments calculated? The formula
For a standard UK capital repayment mortgage, the monthly payment is:
M = P × r × (1 + r)^n ÷ ((1 + r)^n − 1)
Where:
- M is the monthly payment
- P is the amount borrowed (the principal)
- r is the monthly interest rate, which is the annual rate ÷ 12 (so 4.5% becomes 0.045 ÷ 12 = 0.00375)
- n is the number of monthly payments (25 years × 12 = 300)
Worked example
£200,000 at 4.5% over 25 years:
- r = 0.045 ÷ 12 = 0.00375
- n = 25 × 12 = 300
- (1 + r)^n = 1.00375^300, which is about 3.0737
- M = 200,000 × 0.00375 × 3.0737 ÷ (3.0737 − 1)
- M ≈ £1,111.66 a month
Over the full 300 months you'd pay about £333,499, of which about £133,499 is interest. Lenders' exact figures can differ slightly because some calculate interest daily or apply rate changes part way through a month, but the formula gets you very close.
Where your payment goes each month
Each payment covers that month's interest first, and the rest reduces the balance. In month one of the example above:
- Interest: £200,000 × 0.00375 = £750.00
- Capital repaid: £1,111.66 − £750.00 = £361.66
As the balance falls, the interest portion shrinks and the capital portion grows, even though the payment stays the same. After five years, the balance is still about £175,716. You've paid around £66,700 but only cleared about £24,300 of the loan. That's why the early years feel slow, and why overpaying early has the most effect.
How rate and term change the payment
Using the same formula on a £200,000 loan:
| Rate | Term | Monthly payment | Total interest |
|---|---|---|---|
| 3.5% | 25 years | £1,001.25 | £100,374 |
| 4.5% | 25 years | £1,111.66 | £133,499 |
| 5.5% | 25 years | £1,228.17 | £168,453 |
| 4.5% | 30 years | £1,013.37 | £164,813 |
Two patterns stand out:
- A one-point rate rise adds over £100 a month on this loan, and tens of thousands in total interest.
- A longer term lowers the payment but raises the total cost. Going from 25 to 30 years saves about £98 a month but adds over £31,000 in interest.
These rates are illustrations to show the maths, not a forecast or the rates available to you.
Repayment vs interest-only
| Capital repayment | Interest-only | |
|---|---|---|
| Monthly payment on £200,000 at 4.5% | £1,111.66 | £750.00 |
| Balance at end of 25 years | £0 | £200,000 |
| Total paid over 25 years | About £333,499 | £225,000 in interest, plus £200,000 to repay |
| Needs a plan to repay the loan | No | Yes |
Interest-only payments are simply balance × annual rate ÷ 12. They're lower, but the whole loan is still owed at the end. MoneyHelper, the government-backed guidance service, says very few interest-only residential mortgages are offered now, usually in specific circumstances such as buy-to-let or later life lending. Lenders have to check that you have a credible way to repay the capital under the FCA's responsible lending rules in MCOB 11.6.
Loan-to-value (LTV) and why your deposit matters
LTV is the loan as a percentage of the property's value:
LTV = Loan ÷ Property value × 100
A £200,000 loan on a £250,000 home is 80% LTV (a 20% deposit). Lenders generally price mortgages in LTV bands, often in 5% steps such as 60%, 75%, 85%, 90% and 95%, with the best rates usually reserved for lower LTVs because the lender's risk is lower. Exact bands and rates vary by lender.
Two practical points:
- Moving down a band can matter more than a small saving elsewhere. If you're just above a threshold, a slightly bigger deposit may unlock a cheaper rate.
- LTV changes as you repay and as prices move. When your fixed deal ends, a lower LTV can mean better remortgage options.
Remember that your deposit has to cover stamp duty and fees as well. Our guide to how much stamp duty is shows the tax for each UK nation, and the stamp duty calculator works it out.
Overpayments
An overpayment is any amount you pay above your contractual payment. It reduces the balance straight away, so less interest builds up afterwards.
Using the same example, paying an extra £100 a month from the start:
- The mortgage is cleared in about 21 years and 6 months instead of 25 years.
- Total interest falls from about £133,499 to about £112,358, saving roughly £21,100.
Most lenders let you either shorten the term or keep the term and reduce your monthly payment after an overpayment. Ask which your lender applies.
Overpayment allowances
During a fixed or discounted deal, most lenders cap how much you can overpay without a charge. Many allow around 10% of the balance a year. Halifax, for example, lets customers with early repayment charges overpay up to 10% of the balance owed on 1 January each year, and only charges on the amount above that. Allowances, reset dates and whether unused allowance rolls over all vary, so check your own mortgage offer.
Early repayment charges (ERCs)
An ERC is a fee for repaying more than your allowance, switching lenders or clearing the mortgage during a deal period. It's often a percentage of the amount repaid that steps down over the deal.
The FCA's rule in MCOB 12.3 says an ERC must be able to be expressed as a cash value and must be a reasonable pre-estimate of the costs the lender faces because you repaid early. Your lender has to show ERCs in the illustration you get before taking the mortgage.
Before switching or making a large lump sum payment:
- Find your ERC percentages and the date each one ends.
- Check your annual overpayment allowance and when it resets.
- Work out whether the interest you'd save is more than the charge.
- Ask for a redemption statement if you're thinking of clearing the loan.
A quick mortgage maths checklist
- Calculate the monthly payment at your expected rate.
- Recalculate it at two percentage points higher to check you could cope if rates rise when your deal ends.
- Compare 25-year and 30-year terms on total interest, not just monthly cost.
- Work out your LTV and whether a slightly bigger deposit reaches a lower band.
- Test a modest monthly overpayment and see the effect on term and interest.
- Check your take home pay can cover the payment comfortably. The take-home pay calculator shows what you actually receive each month after tax and National Insurance.
For other borrowing, the same formula drives car finance and personal loans; use the loan calculator for those. If you're comparing overpaying with saving, our guide to compound interest and the compound interest calculator show the other side of the decision.
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FAQ
How is a monthly mortgage payment calculated?
Lenders use the amortisation formula: M = P × r × (1 + r)^n ÷ ((1 + r)^n − 1), where P is the loan, r is the monthly rate (annual rate ÷ 12) and n is the number of months. It produces a fixed payment that covers each month's interest and gradually repays the loan to zero by the end of the term.
How much is a £200,000 mortgage per month?
At an illustrative 4.5% over 25 years, a repayment mortgage costs about £1,111.66 a month. At 5.5% it's about £1,228.17, and over 30 years at 4.5% it's about £1,013.37. Interest-only at 4.5% would be £750 a month, but the full £200,000 would still be owed at the end.
Why do I pay so much interest at the start of a mortgage?
Interest is charged on the outstanding balance, which is highest at the start. In the early years most of each payment covers interest, and only a small part reduces the loan. As the balance falls, more of each payment goes towards capital. That's why overpayments made early in the term save the most interest.
Is it better to overpay or reduce the term?
Both reduce the interest you pay. Overpaying keeps flexibility, because you can stop if money gets tight, while a shorter term locks in higher payments. Check your overpayment allowance and any early repayment charges, and keep an emergency fund first. A regulated mortgage adviser can help you compare options for your circumstances.
What is a good loan-to-value?
Lower is generally better because lenders tend to offer cheaper rates at lower LTVs. Rates usually step down in bands, often every 5%, though exact bands vary by lender. If you're just above a band, a slightly larger deposit or a lower purchase price could move you into a cheaper tier.
Are early repayment charges legal?
Yes, if they meet FCA rules. Under MCOB 12.3, an early repayment charge on a regulated mortgage must be expressible as a cash value and be a reasonable pre-estimate of the lender's costs from early repayment. Charges must be disclosed in your mortgage illustration before you commit.
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