How to Calculate Mortgage Interest Payments

If you want to buy a home, you will probably need to get a mortgage. Understanding how your monthly mortgage payment works will help you understand how much interest you will need to pay your lender and thus how much to budget for.

Find a Mortgage Calculator Online

Before you calculate your mortgage interest, it will help to find a mortgage calculator online. This is a tool that helps you figure out how much your mortgage payments will be. You can find mortgage calculators on many bank websites. You can also find them on websites that help people with money advice.  

Some websites might ask you for personal details, but most calculators only ask for basic information such as the loan amount, interest rate and the period over which you want to pay off the loan. Choose a calculator that is easy to use and suits your purposes. The best ones will show you how much you will pay each month and how much interest you will pay, over time.

How to Use a Mortgage Calculator

Usually, a mortgage calculator will ask you how much you want to borrow. This could be limited to asking you for just the loan amount or it might ask for the house purchase price and deposit, which will allow for the loan amount to be calculated.

It will also ask you what kind of mortgage you want to calculate mortgage payments for. Fundamentally, your choice will be between a repayment mortgage and an interest only mortgage. Typically, owner occupiers take out repayment mortgages while buy-to-let landlords take out interest-only mortgages.

You will also need to enter the interest rate on your mortgage. Please bear in mind that, whilst interest rates on mortgages are usually reset every few years, a mortgage calculator will only reflect the single interest rate that you input.

Another key value you will need to input into the calculator is the mortgage term, i.e. the number of years you will take to pay back the mortgage. Most people choose a term of 25 – 30 years from the start date of the mortgage.

Once you enter these details, the calculator will show you how much you will pay each month and the total interest you will pay over the life of the mortgage, as well as repaying the original principal amount borrowed.

Understanding the components of a Mortgage Payment

A mortgage payment is made up of two parts. One part is the interest payment. This is the cost of borrowing money charged by your lender. The other part is the capital repayment. This is the principal amount you borrowed that needs to be repaid.  

If your mortgage is an interest only mortgage, the principal amount is repaid as a single lumpsum at the end of the mortgage term. As such, the monthly mortgage payments during the mortgage term consist solely of interest payments on the full principal amount.  

If you have a repayment mortgage, however, a proportion of the principal is repaid each month alongside the interest payment on the outstanding mortgage balance. The entire principal amount will thus have been repaid by the time that you get to the end of the mortgage term.

How Monthly Payments on a Repayment Mortgage Work

Interest rates typically tend to be reset every two to five years throughout the life of a mortgage term. With a repayment mortgage, the monthly mortgage payment amount is fixed at any given interest rate, but the respective amounts of the two underlying components, interest and capital, change every month.  

Mechanically speaking, a greater proportion of the total interest that is due over the life of a repayment mortgage is paid earlier during the mortgage term compared to that of the capital repayment. For example, suppose you take out a repayment mortgage of £200,000 for a 25-year term and the current interest rate is 5% per annum. The total amount of interest payable over the life of the mortgage will be c. £150,754 and the capital amount repayable will be the original amount borrowed, £200,000.  

Given a 5% interest rate, your fixed monthly mortgage payment amount will be c. £1,169. However, the split between interest and capital will change every month. For example, after the end of 8 years, i,e. in month 96, the monthly interest payment amount will be c. £671 and capital repayment amount will be c. £498, with the two adding up to c. £1,169. By this stage, you will have paid c. £72,699 or c. 48% of the total interest due over the life of the mortgage and repaid c. £39,542 or c. 20% of the capital. After the end of 16 years, i.e. in month 192, the monthly interest payment will be c. £426 and capital repayment amount will be c. £743, with the two still adding up to c. £1,169. By this stage, you will have paid c. £125,998 or c. 84% of the total interest due over the life of the mortgage and repaid c. £98,485 of capital or c. 49% of the capital. You will have paid all of the interest and repaid all of the capital owed by the end of the 25-year mortgage term.

How Payments on an Interest-only Mortgage Work

Some people, especially buy-to-let landlords, have access to and choose to take out an interest-only mortgage instead of a repayment mortgage. Unlike with a repayment mortgage, here they only pay the interest due on the mortgage each month. Calculating the monthly mortgage interest payment on an interest-only mortgage is, thus, quite straightforward.  

First, gather the two pieces of information that you will need for the calculation, i.e. the mortgage loan amount (or principal or capital amount) and the current interest rate. For example, suppose that the principal amount is £200,000 and interest rate is 6% per annum. Next, calculate the annual interest due by multiplying the principal amount by the annual interest rate, i.e. £200,000 x 6% = £12,000. Finally, calculate the monthly interest payment by dividing the annual interest due by 12, i.e. £12,000 / 12 = £2,000. The monthly mortgage payment under this example of an interest-only mortgage is thus be £2,000. Please bear in mind, however, that the interest rate can change several times over the entire life of a mortgage term.

Please also bear in mind that, with an interest-only mortgage, the monthly mortgage payment consists of just the interest payment on the outstanding mortgage balance. Therefore, unlike with a repayment mortgage, the entire principal amount is repayable as a single lumpsum at the end of the mortgage term. Since this can be challenging, interest-only mortgage lenders typically require borrowers to indicate their plan for repaying the full mortgage loan amount at the end of the mortgage term. Such a plan, for example, could be to make a sufficient amount of liquid investments that can be sold off and the proceeds used to repay the mortgage principal amount, or to sell the mortgaged property itself at the end of the mortgage term and use the proceeds to repay the mortgage.

FAQ

Q. How do I calculate my mortgage interest payment?

A. The easiest way to calculate your mortgage interest payment is to use an online calculator on a reliable mortgage lender or money advice website.  

The key inputs will typically be your outstanding mortgage balance, interest rate and remaining mortgage term, and whether your mortgage is a repayment or interest-only mortgage.  

With a repayment mortgage, each monthly mortgage payment consists of two parts. One part is the interest payment on the outstanding mortgage balance and the other part is the partial repayment of the principal amount. At any given interest rate, the monthly mortgage payment amount remains fixed over, but the underlying components, interest and capital, change every month. There is no capital left to repay by the end of the mortgage term.

With an interest-only mortgage, on the other hand, each monthly mortgage payment consists of just the interest payment on the full original mortgage loan amount. As there are no ongoing capital repayments, the full principal will need to be repaid as a single lumpsum at the end of the mortgage term. Since this can be challenging, interest-only mortgage lenders typically require borrowers to indicate their plan for repaying the full mortgage loan amount at the end of the mortgage term. This could, for example, consist of making and selling off liquid investments or selling the mortgaged property itself.