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How do mortgage payments work?

Find out how mortgage repayments work, when you make your first mortgage payment, how to overpay your mortgage and if you can take a mortgage repayment holiday.

In this article
How do mortgage repayments work? How are mortgage repayments calculated? How much of my mortgage am I paying off each month? How are interest-only mortgage repayments calculated? When will I make my first mortgage repayment? What is in my mortgage statement?
Can I overpay on my mortgage? Can I take a repayment holiday? Can I reduce my mortgage repayments? What happens if I miss a mortgage repayment? Get one-to-one mortgage advice from an expert

How do mortgage repayments work?

For most of us, buying a property will involve taking out a mortgage. It’s one of the biggest loans we will take out, so it’s really important to understand just how your repayments work and what your options are for reducing them.

When you buy a property, what you pay will be made up of two parts - your deposit and your mortgage. The larger your deposit you have in place, the smaller the mortgage you will need to borrow.

So for example, if your deposit is worth 10% of the purchase price, then you will need to take out a mortgage for the remaining 90%. 

The amount that the mortgage will cost you to pay off will be determined by two additional factors - the term of the mortgage and the interest rate.

You will then make a monthly repayment towards the mortgage so that it is paid off when you reach the end of your mortgage term.

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How are mortgage repayments calculated?

You essentially have two different things that you need to pay off when it comes to your mortgage - the sum you have borrowed, referred to as the ‘capital’, and the interest charged on that loan.

With a repayment mortgage, your monthly payment is made up of two different parts. Part of the monthly payment will go towards reducing the size of your outstanding debt, while the rest will go towards covering the interest charged on that debt. 

Let's look at an example. Say you've borrowed £200,000 for 25 years, at an interest rate of 3%.

Over the lifetime of the mortgage, you'll be charged £84,478 in interest, meaning you need to pay back £284,478 over 300 months (25 years x 12 months). 

Your monthly repayment will be £284,478/300 = £948.

Use our mortgage repayment calculator to find out how much your monthly repayments will be. 

How much of my mortgage am I paying off each month?

In the early years of your mortgage, a big chunk of your repayments will simply be paying interest on the capital you've borrowed, and a smaller part will pay off your capital. 

But the more capital you pay off, the lower your interest repayments will be. 

Once you get to the end of your mortgage term, the capital you have borrowed will be repaid - the mortgage will be repaid in its entirety. The table below shows how your interest and capital repayments will change over the term of your mortgage. 

In this scenario, you have borrowed £200,000 over a 25-year term, at an interest rate of 3%. Your monthly mortgage repayments are £948.

Year Outstanding mortgage Interest payment Capital payment % interest % capital
1 £200,000 £5,925 £5,456 52% 48%
2 £194,544 £5,759 £5,622 51% 49%
3 £188,923 £5,588 £5,793 49% 51%
4 £183,130 £5,412 £5,969 48% 52%
5 £177,161 £5,231 £6,150 46% 54%
6 £171,011 £5,044 £6,337 44% 56%
7 £164,673 £4,851 £6,530 43% 57%
8 £158,143 £4,652 £6,729 41% 59%
9 £151,414 £4,448 £6,933 39% 61%
10 £144,481 £4,237 £7,144 37% 63%
11 £137,336 £4,019 £7,362 35% 65%
12 £129,975 £3,795 £7,586 33% 67%
13 £122,389 £3,565 £7,816 31% 69%
14 £114,573 £3,327 £8,054 29% 71%
15 £106,519 £3,082 £8,299 27% 73%
16 £98,220 £2,830 £8,551 25% 75%
17 £89,668 £2,569 £8,812 23% 77%
18 £80,857 £2,301 £9,080 20% 80%
19 £71,777 £2,025 £9,356 18% 82%
20 £62,421 £1,741 £9,640 15% 85%
21 £52,781 £1,448 £9,934 13% 87%
22 £42,848 £1,145 £10,236 10% 90%
23 £32,612 £834 £10,547 7% 93%
24 £22,065 £513 £10,868 5% 95%
25 £11,197 £183 £11,198 2% 98%

How are interest-only mortgage repayments calculated?

Things are slightly different with interest-only mortgages. The idea is that each month the repayment you make simply covers the interest charged on the money you have borrowed. 

Then when you get to the end of your mortgage term - say 25 years down the line - you’ll then have to repay the capital you borrowed.

In the same scenario as above, you'd pay a total of £149,992 in interest. This figure is higher because the amount you've borrowed at the outset never reduced. 

Therefore, your monthly repayment would be £149,992/300 = £500.

However, at the end of the 25 years, you would need to be able to repay the £200,000 capital you borrowed in the first place - if you are unable to do that, then you may need to sell the property or face the risk of repossession.

Find out more in our guide to Interest-only mortgages explained.

When will I make my first mortgage repayment?

Your first mortgage repayment will be made in the month after you complete the mortgage.

Your mortgage lenders will write to you to set out the exact date that the money will come out of your account.

Most lenders allow you to change the date for your regular payments, so you can pick a date which is more convenient for you, perhaps because it is the same day that you receive your monthly salary.

It’s worth remembering that your first mortgage payment will usually be much larger than your regular monthly repayment.

That’s because the first payment will include an initial interest payment, covering the interest for the days between the date you complete on the house and the end of that month.

So let’s say you complete on the 10th. Interest will be charged from that date to the end of the month, and then added to your standard monthly payment the following month.

What is in my mortgage statement?

Each year you will be sent an annual statement from your mortgage lender.

This will include information such as:

  • How much you have repaid so far
  • How much you still owe
  • Any charges you may incur if you pay the mortgage off entirely

Can I overpay on my mortgage?

Most mortgages will allow you to overpay a certain amount, usually around 10% per year, without incurring any additional charges. 

If you can afford to do so, it makes sense to overpay as you will clear the mortgage more quickly, saving money on interest payments in the process.

Let’s go back to our example above of a £200,000 mortgage on a 25-year term with a 3% interest rate. If you overpaid by £90 a month, you would clear the debt in just 22 years, saving you three years’ worth of interest payments on the loan. This would mean a saving of £11,358.

Can I take a repayment holiday?

As the name suggests, a mortgage repayment holiday is when you take a break from making repayments towards your mortgage for a set period. You’ll need to agree to this in advance with your lender - you can’t simply stop making payments.

Generally, a repayment holiday is only available if you have previously overpaid on your monthly mortgage repayments for a certain period. By doing this you will have effectively built up ‘credit’ on your mortgage account, giving you some leeway to take a break from payments.

While you won’t make repayments during the holiday, interest will still be charged, so you will end up owing more as a result of taking one.

Repayment holidays can be useful if you are going through a difficult financial period, for example, if you or your partner has taken parental leave following the birth of a child and so your income has gone down. 

Which lenders offer repayment holidays?

Many lenders offer repayment holidays, though the exact conditions will vary between them. 

With Halifax for example, you will need to have had the mortgage for at least 12 months, owe less than 75% of the value of the property and not have taken any additional borrowing within the last six months. You also cannot have had previous payment holidays totalling six months nor taken one in the last three years.

It’s largely similar with Nationwide, though your outstanding debt can be up to 80% of the property’s valuation.

Some lenders, like Barclays, won’t allow you to take a full holiday, but will allow you to underpay for a period should you have overpaid in the past, while others, like Santander, will only offer them to borrowers on an offset mortgage.

It’s important to check your mortgage details to establish just what sort of payment holiday facility if any, your lender offers.

An impartial mortgage broker will be able to advise you on this - you can call Which? Mortgage Advisers on 0800 197 8461 for a free, no-obligation consultation.

Can I reduce my mortgage repayments?

You may be able to extend your mortgage term in order to lower your monthly mortgage repayments.

For example, if your mortgage is currently on a 25-year term and you move it to a 30-year term, your monthly repayments will fall as you are taking longer in order to clear the capital you’ve borrowed.

While this will reduce your monthly outgoings, it will increase the overall amount you repay. Because you are taking longer to clear the capital you’ve borrowed, you’ll also be charged interest for longer, meaning a larger total repayment. 

Let's look at an example. If you borrowed £200,000 over 25 years at an interest rate of 3%, you'd repay £948 and repay £284,478 in total.

Extending your term to 30 years will reduce your monthly repayments to £843, but you'll repay 303,495 - an extra £19,000.

You may also be able to switch part or all of your mortgage debt onto an interest-only mortgage. Lenders may offer this as an option if you are experiencing some financial difficulties to help you avoid falling into arrears. 

Remember, while this will mean lower monthly payments, you will still need to find a way to repay the capital you borrowed at the end of your mortgage term.

What happens if I miss a mortgage repayment?

If you miss a mortgage repayment, a mark will be left on your credit score. This will dent your chances of being able to borrow in the future. That mark will remain for six years.

Falling behind on your mortgage repayments can also lead to serious problems with your mortgage lender, potentially even having the property repossessed. 

If you are having money issues then it’s really important that you speak to your mortgage lender as early as possible as they may be able to help you by switching part of the loan to an interest-only basis, reduce your payments for a short period, or extend the mortgage loan so your repayments are more manageable.

If you are having money worries, it’s a good idea to speak to a debt charity. Find out more in our guides to dealing with debt

Get one-to-one mortgage advice from an expert

If you're looking for a mortgage, give Which? Mortgage Advisers a call on 0800 197 8461, or fill out the form below. 

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