How it works
How UK mortgages work
In the UK, almost all new mortgages are repayment (capital & interest) — you pay down the loan over the agreed term, usually 25 years, and own the property outright at the end. Interest-only mortgages still exist but are now niche (mostly buy-to-let). The rate is usually fixed for an initial deal period (2, 5 or 10 years) and then reverts to the lender's Standard Variable Rate (SVR).
Lenders look at Loan-to-Value (LTV) — the loan as a percentage of the property value — and your affordability (income, existing debt, commitments). The lower your LTV, the better the rate. 60% LTV or lower usually unlocks the best deals.
The monthly payment formula, plainly
The standard amortisation formula does two things simultaneously: it charges monthly interest on the outstanding balance, and it chips away at the capital so the balance hits zero at the end of the term.
Worked example: £250,000 at 4.5% over 25 years
Monthly rate r = 0.045 / 12 = 0.00375. Term n = 25 × 12 = 300 months.
Payment = 250,000 × (0.00375 × 1.00375^300) / (1.00375^300 − 1) ≈ £1,389.58.
Total paid over 25 years ≈ £416,874. Interest paid ≈ £166,874.
In month 1, roughly £937.50 is interest and £452.08 is capital. By the final year, almost every pound goes on capital.
What changes your monthly payment
Small tweaks have big long-run effects. Here is what moves the number most:
| Change | Impact on £250k / 4.5% / 25y baseline |
|---|---|
| +1% rate (to 5.5%) | +£145/month, +£43,500 over term |
| −1% rate (to 3.5%) | −£138/month, −£41,400 over term |
| Term 30 instead of 25 | −£123/month, +£48,400 total interest |
| Term 20 instead of 25 | +£192/month, −£47,400 total interest |
| Overpay £100/month | Mortgage-free ~2.5 years early, save ~£21k interest |
Fixed, tracker or variable?
Most borrowers pick a fixed deal (2, 5 or 10 years) for certainty. A tracker follows the Bank of England base rate plus a margin — cheaper when base rates fall, painful when they rise. The Standard Variable Rate is the lender's default after your deal ends and is nearly always the most expensive option; remortgaging a month or two before deal-end usually saves money.
Overpayments: the quiet superpower
Most fixed-rate mortgages allow you to overpay up to 10% of the balance per year without an Early Repayment Charge (ERC). Even small overpayments save outsized interest because they reduce the balance compound-daily.
An extra £100/month on a £250,000 mortgage typically shaves 2–3 years off the term and saves £15,000–£25,000 depending on the rate. Check your own lender's overpayment policy and any ERC before you commit.
Other costs to budget for
- Stamp Duty Land Tax — see our stamp duty calculadora. First-time buyers get relief up to £425,000.
- Arrangement / product fees — typically £0–£1,999. Can be added to the loan but you'll pay interest on them.
- Valuation, survey, conveyancing and searches — budget £1,500–£3,000 for the legal and survey stack.
- Buildings insurance — lenders require it from completion day. Compare annually to keep premiums honest.