How a repayment mortgage is amortised: the monthly payment formula, why early payments are mostly interest, a worked UK example, the effect of overpayments, rate changes and term length.
With a repayment mortgage, each monthly payment covers that month's interest plus some of the loan itself. The way the balance falls over time is called amortisation. Understanding it explains why the balance falls slowly at first, why overpaying early has the biggest effect, and how rate changes affect you.
How the monthly payment is set?
For a fixed interest rate, lenders calculate a level monthly payment that clears the loan exactly by the end of the term:
M = P × r ÷ (1 − (1 + r)−n)
- M = monthly payment
- P = loan amount
- r = monthly interest rate (annual rate ÷ 12)
- n = number of monthly payments
In practice, UK lenders may calculate interest daily or monthly, so actual payments can differ slightly from calculators.
A worked example
A £200,000 repayment mortgage at 4.5% over 25 years (300 payments):
- Monthly payment: about £1,112.
- Total interest over the full term, if the rate never changed: about £133,500.
Where each payment goes?
| Payment | Interest | Capital repaid | Balance after |
|---|---|---|---|
| Month 1 | £750 | £362 | £199,638 |
| Month 120 (year 10) | £547 | £565 | £145,317 |
| Month 240 (year 20) | £227 | £885 | £59,629 |
| Month 300 (final) | £4 | £1,108 | £0 |
In the first month, about two-thirds of the payment is interest. After ten years, more than a quarter of the original loan has been repaid, and the capital portion keeps growing as the balance falls.
Why early payments are mostly interest?
Interest is charged on the outstanding balance. At the start, the balance is at its highest, so interest takes most of the payment. As the balance falls, less interest is due, so more of each payment reduces the loan.
The effect of overpayments
Overpaying reduces the balance immediately, so less interest is charged from then on. In the example, overpaying £100 a month from the start would clear the mortgage in about 21½ years instead of 25, and save roughly £21,000 in interest.
Before overpaying:
- check your lender's overpayment allowance; many allow 10% of the balance a year during a fixed deal without early repayment charges;
- ask whether overpayments reduce your term or your monthly payment;
- keep an emergency fund and clear more expensive debt first;
- compare with saving: if savings rates (after tax) beat your mortgage rate, saving may be better.
The effect of interest rates
If the rate in the example were 5.5% instead of 4.5%, the monthly payment would rise to about £1,228. When a fixed deal ends, your payment is recalculated based on the remaining balance, term and new rate, so remortgaging on time matters.
Term length
A longer term lowers the monthly payment but increases total interest. A shorter term does the opposite. Many first-time buyers now take terms of 30 years or more for affordability; overpaying later, when income rises, can shorten the effective term.
Offset mortgages
With an offset mortgage, savings held with the lender reduce the balance on which interest is charged. £20,000 of savings against a £200,000 mortgage means interest is charged on £180,000. The effect is similar to overpaying, but you keep access to the savings. Offset rates are sometimes higher, so compare.
Interest-only mortgages
With interest-only, you pay only interest, so the balance doesn't fall. You must have a credible plan to repay the full loan at the end of the term.
Using an amortisation calculator
A good calculator shows a full schedule, the effect of overpayments, and different rates. Use it to compare deals by total cost over the fixed period, including fees.
Frequently asked questions
Why does my balance fall so slowly?
Because early payments are mostly interest. It speeds up over time.
Is it better to overpay early or late?
Early overpayments save more interest, because they reduce the balance for longer.
Sources and further reading
Facts checked on 20 October 2026. Spotted an error? Tell us and we will correct it.
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James has 12 years of experience in personal finance and insurance comparison. Previously worked at Hargreaves Lansdown and now writes independently.
Last updated: 2026-04-25 · Fact-checked by editorial team
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