Understanding Mortgage Amortisation: Where Your Payment Actually Goes

An amortising loan is designed so that a constant payment reduces the balance to exactly zero at the end of the term. Getting that to work requires the split between interest and principal to change every single month, and that changing split explains almost everything people find surprising about mortgages.

The mechanism

Each month:

1. Interest is charged on the current outstanding balance.
2. Your payment covers that interest first.
3. Whatever remains reduces the principal.
4. Next month the balance is smaller, so interest is smaller, so more of the same

payment goes to principal.

The payment is constant. The composition is not.

What that looks like in practice

A £300,000 loan at 6% over 30 years, payment ≈ £1,799:

In month one, 83% of the payment is interest. The 50/50 crossover happens around month 216 — year 18 of 30.

Why overpaying early is disproportionately effective

An overpayment reduces the principal immediately, which removes all future interest that principal would have generated for the entire remaining term.

On the loan above, a single extra £5,000 in year 1 saves roughly £22,000 in interest and shortens the term by about 14 months. The same £5,000 in year 25 saves under £1,500.

An extra £100 every month from the start typically removes 5–6 years and £70,000+ of interest. Model it with the mortgage payoff calculator.

Two things to check before overpaying:

• Early repayment charges on fixed-rate deals.
• How the lender applies it. Insist it reduces the balance rather than being

held as a credit toward future scheduled payments.

Term length is a real trade-off

Five years shorter costs £134 more a month and saves £67,000. Whether that is worth it depends entirely on what else that £134 would do — this is a real decision, not an obvious one.

Reading a schedule properly

Look for three things rather than scanning every row:

• The crossover month where principal first exceeds interest.
• The balance at year 5, since most people move or refinance before then.
• Total interest, which is the actual price of borrowing.

What amortisation does not include

Your real monthly outgoing includes property tax, insurance, and often PMI — lenders bundle these as PITI. Amortisation covers only principal and interest. The mortgage calculator handles the rest as separate components.