Most UK lenders work out interest on your balance every day and collect it as part of your monthly payment. As you pay the loan down, the interest falls with it. On a repayment mortgage the early payments are mostly interest, which is why the balance seems to crawl down in the first few years. Here is exactly what the calculator does with your numbers.
The formula. Take the loan (P), the monthly rate (r, which is the yearly rate divided by 12) and the number of monthly payments (n). The monthly payment is P × r × (1 + r)ⁿ divided by ((1 + r)ⁿ minus 1). That is the standard formula lenders use for monthly mortgage repayments. On an interest only mortgage it is simply the balance times the yearly rate, divided by 12.
Interest during the deal. For each deal the calculator runs the balance forward month by month to the end of the fixed or tracker period. Interest paid is everything you paid in that time, less the amount the balance actually went down. Add the fees, take off any cashback, and you have the true cost of that deal.
What the calculator assumes. The calculator assumes your rate stays the same for the whole deal, that every payment is made in full and on time, and that you do not overpay. Lenders usually charge interest daily rather than monthly, so their figures may be a few pounds out from ours either way.
Mortgage interest guide
When people ring me about rates, the first question is nearly always what the lowest rate is. Fair question, but it is rarely the whole answer. The deal that saves you money is the one with the lowest cost once the fee, the length of the deal and what happens afterwards are all counted. This is how I would look at it if you were sat across the desk from me.
Take your current mortgage balance, times it by your interest rate and divide by 12. On £200,000 at an example rate of 4.5%, that is about £750 of interest in the first month, or roughly £24.66 a day. On a repayment mortgage with 25 years left, the monthly payment would be about £1,111.66, so only around £362 of that first payment actually reduces the loan.
Over the next 12 months you would pay about £8,909 in interest and clear around £4,431 of the balance. Your most recent annual mortgage statement, or your lender's online banking, shows your balance, current interest rate and remaining term in years and months, so you can put your own figures into the second tab of the calculator.
The initial rate is what you pay during the deal. The APRC (annual percentage rate of charge) is the figure every mortgage illustration has to show. It blends the initial rate, the fees and the lender's standard variable rate across the whole mortgage term, as if you never switched. APR is the older measure used for loans and credit cards, and people still use it loosely for mortgages.
The APRC is handy for comparing like with like, but most people move to a new deal when the current one ends. That is why I look at the true cost over the deal period first, which is exactly what this calculator shows.
A fixed rate stays put for the deal, usually two, three or five years, so your monthly mortgage payments do not move. A tracker follows the Bank of England base rate plus a set margin, so it rises and falls with it. Some trackers have a floor, called a collar, below which the rate will not drop.
The standard variable rate, or SVR, is the lender's own rate that you roll onto when a deal ends. The lender can change it when it likes, and it is normally well above the deals on offer. That is why we contact clients months before their deal runs out, so they can line up a remortgage or a new deal with their current lender.
The Bank of England reviews base rate eight times a year. If you are on a tracker or the SVR, a rate change usually reaches your payment within a month or two. On a fixed rate you will not feel it until the deal ends. Fixed rates are priced on what the markets expect rates to do, so they often move before base rate does.
Use the second tab to test it. On £200,000 over 25 years, a rise from 4.5% to 5.5% adds about £116.51 to the monthly payment. Running a 1% rise is a sensible stress test before you choose between a fix and a tracker.
Lenders price their deals in bands of loan to value (LTV), usually at 60%, 75%, 80%, 85%, 90% and 95%. The lower your LTV, the lower the risk to the lender and the better the rates tend to be. Sitting just over a band edge, say 75.5%, can mean paying the next band's rate. Check where you sit with our loan to value calculator before you apply.
When you remortgage, your LTV is worked out on today's value and your current mortgage balance, not what you paid. If prices near you have gone up, you may have dropped into a better band without doing anything.
A lower rate with a big product fee only wins if the loan is large enough for the interest saving to cover the fee during the deal. Adding the fee to the loan saves finding the cash upfront, but you then pay interest on it for as long as it sits in the mortgage. On smaller loans the no fee deal often comes out ahead.
Product fees are not the only cost when you switch. Our guide to remortgage costs explained runs through valuation, legal and exit fees, plus early repayment charges.
These are example rates to show the maths, not rates on offer today. Both are two year fixes on a 25 year repayment mortgage, with the fee paid upfront.
Deal A: 4.09% with a £999 fee. Monthly payment £1,332.05. Interest over the two years £19,987. True cost £20,986.
Deal B: 4.39% with no fee. Monthly payment £1,374.02. Interest over the two years £21,473. True cost £21,473.
The result. Deal A wins by about £487, even after paying the fee. Run the same two deals on a £100,000 loan and it flips: Deal A costs £8,994 and Deal B costs £8,589, so the no fee deal is about £404 cheaper. In this example the break even point sits at around £170,000.
Adding the fee to the loan. Put Deal A's £999 on the mortgage instead and the payment rises to £1,337.37, with a true cost of about £21,066 over the two years. Still a little cheaper than Deal B here, but you carry that £999, plus interest, until it is paid off. This is the bit that trips people up: the lowest rate is not always the cheapest mortgage.
On an interest only mortgage your monthly payment covers the interest and nothing else. The balance stays the same, so you need a solid plan to repay it at the end. Payments are lower, but you pay far more interest overall because the loan never shrinks. Pick interest only in either tab to see the difference.
If you want to look at mortgage repayments over the full term, or what a shorter term would do, our mortgage repayment calculator goes into that in more detail.
Some mortgages are split into more than one sub account, often because you borrowed more later or have part repayment and part interest only. Each sub account can have its own rate, balance and end date, and your annual statement lists them separately.
Run each sub account through the calculator on its own, then add the monthly payments together. If one sub account is on the SVR while another is still fixed, that is usually the first one worth sorting out.
How is mortgage interest calculated in the UK? Most lenders work out interest daily on the outstanding balance and collect it monthly. A few older mortgages calculated it once a year. Either way, the interest goes down as your balance goes down.
Is this mortgage interest calculator accurate? It uses the standard formula lenders use for monthly mortgage repayments, so it should land very close. Lenders calculate daily and round in their own way, so your lender's figures may differ by a few pounds. It is for illustration only and is not financial advice.
What is the difference between APR and APRC? APRC is the mortgage version. It includes the initial rate, the fees and the rate you revert to, spread across the whole term. APR is the general measure for other credit. Both assume you keep the mortgage for the full term, which most people do not.
Should I go for the lowest rate or the lowest fee? Neither on its own. Compare the true cost over the deal: interest plus fees, less any cashback. Larger loans tend to suit a lower rate with a fee, while smaller loans often suit a no fee deal.
Is it better to add the product fee to the mortgage? It spreads the cost, but you pay interest on the fee for as long as it stays in the loan. If you can pay it upfront it usually works out a little cheaper. Some lenders also charge a booking fee upfront either way.
How much does a 1% rate rise add to my monthly mortgage? On £200,000 over 25 years, going from 4.5% to 5.5% adds about £117 a month. Put your own balance and remaining term into the second tab to see your figure.
Where do I find my current mortgage balance and rate? On your most recent annual mortgage statement, or in your lender's online banking or app. It shows the balance, the current interest rate, the remaining term in years and months, and any sub accounts.
What happens to my rate when my fixed rate ends? If you do nothing you will usually move onto the lender's standard variable rate, which is normally much higher. Many lenders let you secure a new deal several months before the end, so it pays to start early.
Can a mortgage broker help me find a lower rate? We compare deals from lenders across the market, not just one bank, and check them against what your current lender is offering. We are fee free on over 90% of cases. For mortgage help, call 03300 432 428 or book a free appointment.
Your home may be repossessed if you do not keep up repayments on your mortgage. There may be a fee for mortgage advice. We are fee free on over 90% of cases, charge £299 on mortgages under £100,000, and complex or adverse cases can carry a fee of up to £995. This calculator and guide are for illustration only and are not financial advice.
