How Are Mortgage Repayments Calculated? The Formula Explained

One Number, Three Inputs

A mortgage quote arrives as a single monthly figure, which makes it feel like something a lender decides rather than something you can check. It is not. That figure comes out of one equation with exactly three inputs: how much you borrow, the interest rate, and how long you take to pay it back.

Understanding how those three combine tells you far more than the monthly number alone — including the uncomfortable fact that on a typical 25-year mortgage, you will repay well over one and a half times what you borrowed.

What a Repayment Is Made Of

Every monthly payment on a repayment mortgage does two jobs at once:

It pays the interest that has built up on whatever you still owe.
It pays off a slice of the debt itself — the capital.

The payment stays level, but the split between those two shifts every month. Because interest is charged on the outstanding balance, and that balance falls, the interest portion shrinks and the capital portion grows. This process is called amortisation, and it is the reason a mortgage feels like it is going nowhere for years.

The Repayment Formula

The standard formula lenders and calculators use is:

M = P × [ r(1 + r)ⁿ ] ÷ [ (1 + r)ⁿ − 1 ]

M = your monthly payment
P = the principal, meaning the amount borrowed (purchase price minus deposit)
r = the monthly interest rate, which is the annual rate divided by 12
n = the total number of monthly payments, which is the term in years multiplied by 12

The two italics are where nearly everyone goes wrong. If you put an annual rate of 4.5% and a term of 25 into that formula, you get nonsense. It needs 0.00375 and 300.

A Worked Example

You buy a £280,000 house with a £42,000 deposit, over 25 years, at 4.5%.

Principal: 280,000 − 42,000 = £238,000
Monthly rate: 0.045 ÷ 12 = 0.00375
Number of payments: 25 × 12 = 300
Monthly payment: £1,322.88

Multiply that by 300 payments and you have paid £396,864 to borrow £238,000. The interest alone is £158,864 — roughly the price of a small flat, and 1.67 times the original loan repaid in total.

Why Early Payments Barely Touch the Debt

Here is where amortisation stops being an abstraction. In that example, the very first payment of £1,322.88 splits like this:

Interest: £892.50
Capital repaid: £430.38

Two thirds of your first payment does nothing to reduce what you owe. And it stays lopsided for a long time:

Capital only overtakes interest at payment 116 — nine years and eight months in.
The balance does not halve until payment 191 — almost sixteen years into a twenty-five year term.

This is not a trick by the lender. It falls straight out of charging interest on a balance that starts high. But it explains why moving house after five years can feel like you have barely made a dent: at that point you would still owe £209,102 of the original £238,000.

What a Longer Term Really Costs

Stretching the term is the usual lever for lowering a monthly payment, and it works — but the price is steep. On the same £238,000 at 4.5%:

25 years: £1,322.88 a month, £158,864 total interest
30 years: £1,205.91 a month, £196,128 total interest

Five extra years buys you £117 a month of breathing room and costs you £37,264 in extra interest. Whether that is worth it depends entirely on your circumstances, but it should be a decision made with the second number in view, not just the first.

What One Percentage Point Does

Rate matters more than most people expect, because it applies to the whole balance for the whole term. Taking the same loan from 4.5% to 5.5%:

Monthly payment: up £138.65, from £1,322.88 to £1,461.53
Total interest: up £41,594

A single percentage point costs more over the term than five extra years of borrowing. It is worth remembering that a rate is not a small print detail; it is the single most expensive number on the paperwork.

Overpaying Works Backwards Through the Formula

Because early payments are so interest-heavy, an overpayment made early is unusually powerful: every extra pound goes straight at the capital, and removes all the future interest that pound would have attracted.

Overpaying just £100 a month on our example mortgage clears it in 22 years instead of 25 — three years early — and saves £21,719 in interest.

Most lenders allow overpayments of up to 10% of the balance each year without penalty, but early repayment charges do exist, so check your terms before setting up a standing order.

Repayment vs Interest-Only

Everything above describes a repayment mortgage, which is what the formula models. On an interest-only mortgage you pay only the interest each month — on our example that would be £892.50 rather than £1,322.88 — and the full £238,000 is still owed at the end of the term. The monthly saving is real, but the debt does not move, and you need a separate plan to repay it.

What the Formula Leaves Out

A calculated repayment is an accurate piece of arithmetic, not a prediction. Three things sit outside it:

Your rate almost certainly will not last the term. Most UK mortgages fix for two or five years, then revert to a variable rate unless you remortgage. Any 25-year interest total assumes today's rate for the whole period, which is a modelling assumption rather than a forecast.
Lenders may compute interest daily. The formula compounds monthly. Real statements can differ by a few pounds a month as a result.
The monthly payment is not the monthly cost. Buildings insurance, service charges, ground rent, product fees, and maintenance all sit on top.

Use the number to compare scenarios and to sanity-check what a lender quotes you, and treat any figure stretching decades into the future as an illustration rather than a promise.

Conclusion

Three inputs, one formula, and a payment split that shifts a little further in your favour every month. Once you can see how the term and the rate each pull on the total, an offer stops being a single monthly figure to accept or reject and becomes something you can interrogate. Run your own numbers through a Mortgage Calculator to compare terms, rates, and deposits side by side before you commit to any of them.

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