Loan and mortgage calculator

Because the amount you borrowed isn't the amount you repay. Interest is charged on what's still outstanding, and at the start that's nearly the whole loan, so the early payments are mostly interest with only a little going to the debt itself.

Borrow 20,000 over five years at 8% and you'll repay about 24,300. The 4,300 is what the arithmetic below produces.

Where the payment comes from

Each month, interest is charged on the current balance. What's left of your payment reduces the balance. Next month, the balance is smaller, so the interest is smaller, so slightly more of the same payment goes to the debt.

That's the whole mechanism, and it's why the split changes over the life of the loan while the payment stays the same.

On a 25 year mortgage, the first payment can be 75% interest. The last one is almost entirely capital. The schedule here shows the crossover, which is usually later than people expect.

Why overpaying early is worth so much more

An extra payment reduces the balance, and every future month's interest is calculated on that smaller balance. Pay 1,000 extra in year one of a 25 year mortgage and you avoid interest on that 1,000 for 24 years. Pay the same 1,000 in year twenty and you avoid it for five.

The same money, four or five times the saving, purely because of when.

This is the single most useful thing the schedule tells you, and it's why "should I overpay or save?" usually resolves in favour of overpaying when the loan rate is higher than the savings rate.

Check for early repayment charges first. Plenty of fixed-rate deals cap what you can overpay each year, commonly at 10% of the balance, and charge a percentage on anything above that.

What this doesn't include

Fees. Arrangement fees, product fees and valuation fees are real costs and none of them appear in a payment calculation. A lower rate with a large fee can cost more than a higher rate without one, especially on a short term.

Insurance and tax. For a mortgage, the actual monthly outgoing usually bundles buildings insurance and, in some countries, property tax. Those can add a lot.

Rate changes. This assumes the rate holds for the whole term. Most mortgages don't work that way: a fixed period ends and you move to something else. Model the fixed period, then model what happens after it at a rate you'd be uncomfortable with, and check you could still pay it.

Payment holidays and missed payments, which add interest and extend the term.

The number to compare on

The rate alone isn't comparable between offers. The figure designed for comparison is the APR, or APRC for mortgages, which folds compulsory fees into a single annualised rate.

It's imperfect, since it assumes you keep the loan for the full term and most people don't. But comparing two APRs is far more meaningful than comparing two headline rates.

Total repaid is the number that surprises people

Everyone asks about the monthly payment because that's what has to fit in the budget. Fewer people look at the total, and the total is where the decision usually is.

Stretching a loan from three years to five drops the monthly payment noticeably, which feels like relief, and adds substantially to what you hand over in the end. Both figures are shown here for that reason. The cheap monthly payment and the expensive loan are frequently the same loan.

A note on what this is

It's arithmetic, not advice. It doesn't know your circumstances, and a calculation that says you can afford something is not the same as being able to afford it. For a decision of any size, the lender's own illustration is the binding document, and a qualified adviser is worth the fee.

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