Why is my mortgage balance barely going down?
Because early in a repayment mortgage most of each payment is interest, not capital. The payment is level for the whole term, but the split inside it moves — and at the start it is weighted heavily toward interest, so the balance falls slowly even though you are paying in full.
This is the most common reason people go looking for a mortgage tracker, and the answer is arithmetic rather than anything being wrong.
Where the money goes
Take £200,000 over 25 years at 5%. The payment is about £1,170 a month, and it stays about £1,170 for twenty-five years. What changes is what it is made of.
In the first month, interest is one twelfth of 5% of £200,000 — about £833. So of that £1,170, roughly £833 is interest and £337 is capital. After a full year of paying, the balance has fallen by around £3,000, not £14,000.
The reason is that interest is charged on what you still owe. Owe a lot, and most of the payment goes on the interest for owing it. As the balance falls the interest falls with it, so more of the same payment starts landing on the capital. By the last years of the term almost all of it does.
Which is why overpaying early does so much
An overpayment goes entirely against the capital. It skips the interest split completely — and because it reduces the balance, it also reduces every future month's interest for the rest of the term. That is why £100 paid in year two is worth so much more than £100 paid in year twenty.
When it is not just the arithmetic
- An interest-only mortgage. The payment covers the interest and nothing else, so the balance is not meant to fall at all.
- A missed or partial month. Interest still accrues. The balance can rise even though a payment was made.
- Fees added to the loan. A product or arrangement fee added to the mortgage rather than paid up front is a larger balance from day one.
- A rate rise. More of the same payment goes on interest, so capital repayment slows even though nothing about your behaviour changed.
Seeing it rather than reading about it
The split between interest and capital is the single most useful thing to watch, and almost nothing shows it. Mortgage Meadow shows the balance, what has actually been cleared, and what an overpayment does to the date — and how we work it out sets out the model, including where it is deliberately simpler than a lender's.
Questions people ask
Why is so much of my mortgage payment interest?
Because interest is charged on the balance you still owe, and early in the term that balance is at its largest. The payment is level across the term, but the proportion of it going to interest falls as the balance does.
Does an overpayment go straight off the balance?
On a repayment mortgage an overpayment goes against the capital rather than being split with interest, which is why it also reduces every future month's interest. When it takes effect depends on whether your lender calculates interest daily or periodically.