How the monthly payment is calculated
A capital repayment mortgage uses a standard annuity formula. Your lender calculates a fixed monthly payment that repays both the interest charged on the outstanding balance and a slice of the capital itself, in a ratio that shifts gradually over the term. In the early years the vast majority of your payment is interest. As the balance falls, interest charges reduce and more of each payment clears the debt.
On a £240,000 mortgage at 4.5% over 25 years, the monthly payment is £1,333. In month one, £900 of that is interest and only £433 is capital repayment. By year 20, the split reverses — more than half of each payment goes toward clearing the debt. This is why overpaying early in the term saves dramatically more interest than overpaying later.
Total interest is the number that matters most. On that same £240,000 mortgage, total interest paid over 25 years at 4.5% is approximately £160,000 — meaning you repay £400,000 in total to borrow £240,000. Reducing the term by five years through overpayments or a shorter initial term can cut that interest bill by £30,000–£40,000.
LTV — why your deposit size changes everything
Loan-to-value (LTV) is the ratio of your loan to the property's value. A £200,000 mortgage on a £250,000 property is 80% LTV. Lenders price their rates in LTV tiers, and the difference between bands is significant. The most competitive rates are available below 60% LTV. At 75%, rates are slightly higher. At 85% and 90% LTV the gap widens considerably, and at 95% LTV — available mainly to first-time buyers — rates are materially higher still.
This means that saving an extra £5,000–£10,000 to tip from one LTV band into the next can save more over a five-year fix than almost any other financial decision at purchase time. On a £200,000 mortgage, the difference between an 85% and 75% LTV rate is often 0.3–0.5%, which compounds to thousands of pounds over the fix period.
LTV at remortgage matters too. If your property has risen in value since you bought it, your LTV may have fallen even without overpaying. Always get a fresh valuation before remortgaging — a lower LTV tier at the new deal could save £100+ per month compared with your lender's standard rate.
Capital repayment vs interest only
A capital repayment mortgage clears the full debt by the end of the term. An interest-only mortgage only charges you interest each month — the capital balance is unchanged throughout and must be repaid in full at the end, either by selling the property, using an investment vehicle, or remortgaging.
Interest-only has a significantly lower monthly payment — on a £240,000 mortgage at 4.5%, interest-only costs £900 per month versus £1,333 on repayment. But the total cost over 25 years is far higher because no capital is ever cleared. Interest-only is now rare in residential mortgages and lenders require proof of a credible repayment strategy. It remains more common in buy-to-let, where the asset itself is the expected repayment vehicle.
Stress testing — what if rates rise?
When assessing affordability, most lenders stress-test your application at the initial rate plus 3% — meaning if your deal rate is 4.5%, they check you could still afford the payments at 7.5%. This is a regulatory requirement following FCA guidance and explains why many buyers find their borrowing capacity lower than expected.
For your own planning, running the rate comparison above at +1% and +2% shows the real cost of a rate rise at remortgage. Someone who fixed at 1.9% in 2021 and remortgaged at 4.5% in 2024 saw monthly payments on a £250,000 mortgage rise from around £1,040 to £1,376 — an increase of £336 per month or over £4,000 per year.
⚠️ Fixed-rate deals typically last 2–5 years. When your fix ends, you revert to your lender's Standard Variable Rate (SVR), which is generally 1.5–2% above the current base rate and rarely competitive. Start monitoring remortgage options 3–6 months before your deal expires — you can typically lock in a new rate up to 6 months before the end of your current deal without paying an early repayment charge.
How much can you borrow?
Most lenders use income multiples as a starting point — typically 4–4.5× a single income or joint income. At higher income levels, some lenders stretch to 5× or 5.5× for professionals. But affordability assessments also account for existing commitments (loans, credit cards, car finance), the number of dependants, and the stress-tested payment amount. The income multiple is a ceiling, not a guarantee.
The calculator shows an estimated income requirement based on your loan amount. For a precise figure, use the Affordability Calculator which models the full picture including existing commitments and lender stress tests.
Frequently Asked Questions
Should I take a 2-year or 5-year fixed mortgage?
This is primarily a question about your view on rates and your circumstances, not a purely mathematical one. A 5-year fix gives certainty for longer and often has a marginally lower rate than a 2-year fix, but locks you in for longer — if rates fall significantly or your circumstances change (sale, overpayment, job change), you may face early repayment charges of 1–5%. A 2-year fix offers more flexibility but exposes you to rate risk sooner. If you are planning to move within 3 years, a 2-year fix usually makes more sense. If you value certainty and your outgoings are already stretched, a 5-year fix removes the remortgage risk for longer.
What is an early repayment charge (ERC) and when does it apply?
An ERC is a penalty charged if you repay more than the permitted amount during a fixed-rate period or leave the deal early. ERCs are typically 1–5% of the outstanding balance, reducing each year of the fix — for example, 5% in year one, 4% in year two, down to 1% in year five. Most fixed deals allow overpayments of up to 10% of the outstanding balance per year without triggering an ERC. Tracker and variable rate mortgages generally have no ERC. Always check your mortgage offer document before overpaying or remortgaging.
How does a mortgage differ from a personal loan?
A mortgage is a secured loan — the property is collateral and the lender can repossess it if you fail to make payments. This security allows lenders to offer much lower rates and much longer terms than unsecured personal loans. Mortgage interest is calculated on the remaining balance (reducing balance), whereas many personal loans use a flat rate. The regulated nature of mortgage lending in the UK also means lenders must carry out affordability assessments under FCA rules, which personal loan lenders are not required to do to the same degree.
Can I get a mortgage with a 5% deposit?
Yes — 95% LTV mortgages are available, primarily through the government-backed Mortgage Guarantee Scheme (extended to June 2025) and select lenders who participate directly. The rates are significantly higher than at lower LTVs, and lenders apply stricter affordability criteria. A 5% deposit on a £250,000 property is £12,500, giving a £237,500 mortgage at 95% LTV. The monthly payment at current 95% LTV rates (typically 5.5–6%+) would be substantially higher than the same loan at 80% LTV. Use the calculator to compare the two scenarios — the long-term cost difference is significant.
What happens at the end of my fixed-rate deal?
When your fixed-rate period ends, you automatically move to your lender's Standard Variable Rate (SVR) unless you actively remortgage. SVRs are typically 1.5–2% higher than the best available rates and can change at any time at the lender's discretion. For most borrowers, the SVR is the most expensive rate they will pay — staying on it even for 3–6 months can cost hundreds of pounds. Set a reminder 6 months before your fix ends to compare deals. You can reserve a new rate up to 6 months ahead, which costs nothing and protects you from rising rates in the interim.