How UK mortgage repayments work
A mortgage is a long-term loan secured on your home. With a repayment (capital and interest) mortgage, every monthly payment covers that month’s interest plus a slice of the loan. Early on, most of each payment goes on interest. As the balance shrinks, more of it goes towards the loan, which is why the balance chart above curves downwards faster in later years. The monthly figure comes from the standard formula P × r ÷ (1 − (1 + r)−n), where P is the loan, r is the monthly rate and n is the number of payments. For example, £200,000 over 25 years at 5% costs about £1,169 a month, and about £150,750 in interest overall.
Repayment vs interest-only
With an interest-only mortgage you just pay the interest each month. That makes payments much lower, but you still owe the full loan at the end of the term and need a credible plan to repay it, such as investments or selling the property. Interest-only is now mostly used for buy-to-let. For residential buyers lenders usually require a large deposit and a clear repayment strategy.
Loan-to-value (LTV) and your deposit
LTV is the loan as a percentage of the property’s value. A £30,000 deposit on a £300,000 home is a 90% LTV mortgage. Lenders price their rates in LTV tiers, usually 95%, 90%, 85%, 80%, 75% and 60%. Moving down even one tier can cut your rate noticeably, so check whether a slightly bigger deposit would get you into the next band. Don’t forget the upfront costs on top of the deposit: Stamp Duty, solicitor’s fees, surveys and any lender arrangement fee.
How much can I borrow?
Most UK lenders cap borrowing at around 4 to 4.5 times your gross annual income, or your combined income if you’re buying with someone else. Some lenders go to 5× or 5.5× for higher earners or certain professions. The income multiple is only a ceiling. Lenders also check your credit history, regular outgoings, childcare costs and other debts. They also stress-test whether you could still afford the payments if rates rose, which is why the “If rates change” panel is worth a look.
Should I overpay?
Overpaying reduces the balance that interest is charged on. That means a modest regular overpayment can cut years off your mortgage and save thousands in interest. Most fixed and tracker deals let you overpay up to 10% of the outstanding balance each year without an early repayment charge (ERC). If your savings earn less after tax than your mortgage rate, overpaying is often a good use of spare cash. Keep an emergency fund first, though, because overpayments are hard to get back.
Learn more: MoneyHelper mortgage affordability guidance (free government-backed guidance).