How Much of My Mortgage Payment is Interest?

If you have a mortgage, you might wonder how your monthly payment is split. Part of it goes to paying off the money you borrowed (the principal), and part of it goes to paying interest.

Knowing how much of your payment is interest can help you make better money decisions. This article will explain how mortgage payments work and how making extra payments, often called overpayments, can save you money and reduce the length of your mortgage.

If you have an interest only mortgage deal, then your mortgage payment is solely interest, and the principle remains the same throughout the term. The below information is aimed at customers with full capital repayment mortgages, part and part mortgages will be more complicated also.

What Makes Up a Mortgage Payment?

A capital repayment mortgage payment typically comprises two main components: the principal and the interest.

The principal represents the sum you borrowed from the lender to purchase your home. With each payment, you gradually reduce this principal amount. Nowadays, it’s common for first time buyer mortgage terms to extend up to 40 years, providing more flexibility and manageable monthly payments.

Interest, on the other hand, is the cost of borrowing that money. It is the fee the lender charges for the loan. This interest can either be fixed for a certain period, offering predictable payments, or it can be variable or tracker-based, which means the rate can fluctuate over time based on market conditions.

How Are Mortgage Payments Calculated?

When you get a mortgage, the lender gives you a schedule called an amortization schedule. This schedule shows how much of each payment goes to the principal and how much goes to interest.

Here’s An Example

Let’s say you have a £200,000 mortgage with a 4% interest rate over 30 years. Your monthly payment would be around £955. In the first month, about £667 of that payment would go to interest, and £288 would go to the principal. Over time, more of your payment will go to the principal, and less to interest.

Why Does More Go to Interest at First?

At the beginning of your mortgage, the principal is large, so the interest part is also large. As you keep making payments, the principal gets smaller, so the interest part of each payment gets smaller too.

When you are close to the end of your mortgage term, the majority of your monthly payment is principal.

Making Overpayments

Making overpayments involves paying more than your regular monthly mortgage payment. This strategy can accelerate the repayment of your mortgage and save you money on interest.

The benefits of overpayments are significant:

Firstly, you pay less interest. Overpayments reduce the principal balance, and since interest is calculated on this remaining principal, a smaller principal means you will pay less interest overall.

Secondly, overpayments shorten your mortgage term. By paying more than the required amount, you can reduce the number of years you need to make payments, freeing you from your mortgage sooner.

Lastly, you build equity faster. Equity is the portion of your home that you own outright. Overpayments help you increase your equity more rapidly, enhancing your financial stability and investment in your property.

Example of Overpayment:

Using our previous example, if you pay an extra £100 each month, you can pay off your mortgage several years earlier and save thousands of pounds in interest.

How to Make Overpayments

Before making overpayments, it’s crucial to check your mortgage terms. Some mortgages impose penalties for overpayments, so review your mortgage agreement or consult your lender to confirm you can make overpayments without incurring extra charges.

Next, set a budget to ensure you can afford to make overpayments while still covering other expenses and emergencies.

You can establish regular overpayments by setting up a standing order or direct debit. This ensures you automatically pay extra each month. When you remortgage, consider discussing offset mortgages with your mortgage advisor, as they might suit your financial situation.

Additionally, you can make lump sum payments if you receive a bonus, inheritance, or other windfall. Check with your lender on how to proceed, as they may provide a unique reference number to allocate your payment correctly.

Things to Consider

While making overpayments can be highly advantageous, there are a few important considerations to keep in mind:

Ensure you have an emergency fund. It’s crucial to maintain sufficient savings for unexpected expenses before committing to overpayments, as the money used for overpayments isn’t easily accessible.

Additionally, be aware of early repayment charges. Some mortgages impose fees if you overpay beyond a certain limit, which can diminish the benefits of overpaying.

Maximising Your Mortgage Strategy

Understanding how your mortgage payment is divided between interest and principal can significantly improve your financial management. Making overpayments is a strategy that can help you save on interest and pay off your mortgage more quickly.

It’s essential to review your mortgage terms and ensure that overpayments fit within your budget. If you have questions about your mortgage or are considering making overpayments, an independent mortgage broker like us can offer expert guidance.

We provide tailored advice and help you find the best options for your situation. Contact us today for a free, no-obligation appointment to discuss your mortgage and how to make the most of your payments.