How are mortgage payments calculated?

A calendar with a day marked with "Mortgage payment"

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How are mortgage payments calculated?
What can impact the cost?
When do you start paying a mortgage back?
Can you make extra mortgage payments?
Should you use a broker?

published 12 January 2023

Buying a house isn’t the easiest of journeys and one of the most important questions to answer early on is how are mortgage payments calculated.

You’ll need to understand this in order to calculate how much you can afford to borrow and how much you’ll need to pay back each month.

The monthly costs will depend on lots of different factors. These include things you can control, such as the cost of the house, the deposit and the loan-to-value rate.

External factors, such as the Bank of England (BoE) increasing the base rate, or rising or falling house prices, can influence the amount you’ll pay back on your mortgage each month.

Here we look at all the different elements involved with working out how much your mortgage payments will be.

How are mortgage payments calculated?

With a standard repayment mortgage, your monthly payments are calculated by looking at the overall amount you owe and the interest applied to that amount.

The money you need to pay off, also called the ‘capital’ will have been worked out by a mortgage provider looking at the value of the property you are buying and your own financial situation, such as your income and outgoings.

When you take out a mortgage you will be told how much interest is charged, whether this is a set rate or if it’s variable and based on the base rate, and how long a rate will remain the same or if it might change.

A mortgage calculator can quickly tell you how much your monthly payments are likely to be after you enter the overall amount you’re looking to borrow and the term of the mortgage.

This is a rough estimation as the actual figure will be dependent on lots of other elements and the type of mortgage you’ve gone for.

If you have an interest-only mortgage, the amount you pay back each month just covers the interest on the loan. When the mortgage term ends, you’ll be required to make a lump sum to pay off the loan itself.

What can impact the cost?

The amount you pay per month will be shown to you when you take out a mortgage.

Different providers will charge different amounts and therefore it’s important to compare different mortgages to make sure you’re getting the best deal possible.

Lots of elements can impact the cost you pay. These include:

The overall amount you have borrowed
How long is your mortgage term
Whether you’ve chosen a fixed or variable mortgage
The base rate and if this rises or falls

When do you start paying a mortgage back?

In order to buy a house, you need to have a mortgage approved, which usually happens after you have had an offer accepted on a house you’ve seen.

Once you’ve completed the sale, and the house is yours, you will start paying interest on the mortgage and the first payment is due a month after.

You’ll be able to change the date the mortgage payment goes out, if you want to, and you’ll receive an annual statement showing how much you’ve paid and how much you still have to pay off.

Can you make extra mortgage payments?

You can usually overpay on your mortgage by up to 10% per year, although it will depend on the provider.

This can be useful if you come into some money, an inheritance for example, or you just want to clear the loan sooner. However, there are sometimes restrictions on the amount you can overpay in the first few years of a mortgage.

Should you use a broker?

You don’t have to use a mortgage broker, but they can be useful. They should set out all your costs and do the calculations for you.

They also sometimes have access to special deals which aren’t available if you go directly to a provider. However, they may also charge a fee so always factor this into your overall budget.

Elliott Benson, owner and mortgage broker at Sett Mortgages, said: “The first step when looking to buy is always to speak to a mortgage adviser, as they can tell you accurately what your maximum buying budget is.

“If you don't do this first and just use a simple online calculator or just go to one lender, you can end up with either a budget which is too high or not high enough.

“Your mortgage payment depends on the loan amount, the % deposit, the mortgage term and the fixed period itself.”

Rebecca Goodman is a freelance personal finance journalist, regularly writing for The Independent, The Guardian, The Sun and a range of specialist publications. Covering all aspects of finance, Rebecca has worked in the sector for the last decade and specialises in insurance, household finance and consumer issues.