Why Your Early Mortgage Payments Are Nearly All Interest
A mortgage payment stays the same every month for the whole fixed term, and what it is made of changes completely. Understanding that split explains most of what feels strange about the first years of a mortgage. The Mortgage Calculator shows the schedule year by year.
How each payment divides
Every month, interest is charged on the outstanding balance. Your payment covers that interest first, and whatever is left reduces the principal.
At the start the balance is at its largest, so the interest charge is at its largest and very little is left over. On a 250,000 mortgage at 5 per cent over 25 years, the payment is around 1,461 - and roughly 1,042 of the first payment is interest. About 419 comes off the balance.
By the final year the balance is small, the interest charge is a few pounds, and nearly the whole payment reduces the principal. The payment never changed; the ratio inverted.
A useful landmark: on a typical 25-year mortgage, the crossover point where more of the payment goes to principal than interest arrives somewhere around year nine or ten. It arrives later on a longer term and earlier at a lower rate.
Why this is not a trick
It is simply what charging interest on a balance produces. Nothing is front-loaded by design - the interest is large early because the debt is large early, and the arithmetic has no choice about it.
What it does mean is that the first few years build very little equity, which surprises people who move after three or four years and find the balance barely moved. On the example above, after five years of paying nearly 88,000, the balance has fallen by about 28,000.
What an overpayment does differently
An overpayment goes entirely against the principal. It skips the interest queue, which is why it is so much more effective than it looks.
Pay an extra 100 a month on that mortgage from the start and you take roughly three years off the term and save tens of thousands in interest - because every pound removed from the balance also removes all the interest that pound would have generated for the remaining years.
Which is why overpaying early is worth far more than overpaying late. The same 100 in year twenty removes almost no future interest, because there are few years left for it to accrue over.
Two practical checks before relying on this: whether your lender charges for overpayment above a threshold, and whether an overpayment reduces the term or the monthly payment. Reducing the term saves the interest; reducing the payment does not.
And the honest caveat: whether overpaying is the right use of the money depends on your rate, your savings, your other debts and your circumstances. That is a question for a broker or an adviser, not a schedule.
Common questions
Does the schedule change if rates change?
On a variable or expiring fixed rate, yes - the payment is recalculated on the balance and remaining term.
Is a shorter term always better?
It costs far less in total interest and requires a higher payment. The Loan / EMI Calculator shows that trade on any loan.
What is an amortisation schedule?
The month-by-month table of interest, principal and remaining balance. It is the thing this article describes.
Want to see your own schedule?