How amortisation actually works
An amortising loan has a fixed payment, but its composition changes over the term. Interest is charged on the outstanding balance, so early payments are mostly interest and late payments are mostly principal. On a 25-year mortgage at typical rates, the first payment can be 70 percent interest or more, and the crossover to majority-principal often does not arrive until the second half of the term.
This is why overpaying early has a disproportionate effect. A lump sum applied in year one removes that principal from every subsequent interest calculation, so its saving compounds across the whole remaining term. The same sum applied in the final year saves almost nothing.
It also explains why selling a house after a few years returns so little equity from payments alone — most of what has been paid went to interest rather than to reducing the balance.
APR, interest rate and the total cost
The nominal interest rate is not the cost of borrowing. The annual percentage rate incorporates fees — arrangement fees, broker fees, some insurance — and so represents the cost more completely. A loan advertising a lower rate but charging a large fee can be more expensive overall than one with a higher rate and none.
Compare the total amount repayable, not the monthly payment, because a lower monthly payment usually means a longer term and more interest overall. Extending a mortgage from 25 to 35 years reduces the monthly figure noticeably and can increase total interest by more than half.
Watch for structural terms that the headline rate does not capture: variable rates that can rise, introductory periods that revert to a much higher rate, and early repayment charges that penalise overpaying — which negates the strategy above. Read what happens at the end of any fixed period, since that is where the cost usually is.
Affordability beyond the payment
A payment being affordable today is not the same as the loan being affordable. Lenders assess a stress rate — what the payment would be at a materially higher interest rate — and it is worth doing the same yourself, particularly on a variable rate or a short fixed period.
Ownership costs sit outside the loan and are routinely underestimated: property taxes, buildings insurance, maintenance, service charges, and for vehicles, insurance, servicing and depreciation. A payment that consumes the whole margin leaves nothing for the boiler.
This calculator produces estimates from the figures you enter. It is not financial advice, does not account for fees, taxes, insurance or any specific product's terms, and lenders' own calculations will differ. For a decision of this size, use the lender's binding illustration and consider speaking to a qualified, regulated adviser — particularly where a mortgage, a long term or a variable rate is involved.