A repayment mortgage has one payment amount for its whole life. That single fact is the reason the early years feel like nothing is happening, and it is worth understanding properly, because it also explains why overpaying early is worth so much more than overpaying late.
This article is worked through on a 250,000 loan at 5.5% over 30 years. Those are only the numbers I picked. Every figure with a dotted line under it is computed from the inputs under “Your numbers”, so put your own loan in and read the piece about that instead.
The short version
Interest each month is charged on what you still owe. Early on you owe nearly everything, so nearly all of the payment is interest. The payment is fixed, so whatever is left after interest goes against the balance — which is very little at first. As the balance falls, the interest falls with it, and the fixed payment starts demolishing principal instead.
The split is not a policy. It falls out of charging interest on an outstanding balance.
Worked example, with every number shown
A 250,000 loan at 5.5% nominal, over 30 years, with nothing extra paid.
| Input | Value |
|---|---|
| Principal | 250,000 |
| Annual rate | 5.5% |
| Term | 360 months |
| monthly rate | = 5.5% / 100 / 12 | = 0.00458333 |
|---|---|---|
| payment | = 1,419.47 | |
| total paid | = 1,419.47 × 360 | = 511,010.10 |
| total interest | = 511,010.10 − 250,000 | = 261,010.10 |
You repay 2.04 times what you borrowed. The interest alone comes to 261,010.10, which is 1.04 times the loan.
Now the first month:
| interest | = 250,000 × 0.00458333 | = 1,145.83 |
|---|---|---|
| principal | = 1,419.47 − 1,145.83 | = 273.64 |
| balance | = 250,000 − 273.64 | = 249,726.36 |
80.7%
of the first payment is interest
After a full month of paying, the debt has moved by 273.64.
The second month, on a balance that is 273.64 smaller:
| interest | = 249,726.36 × 0.00458333 | = 1,144.58 |
|---|---|---|
| principal | = 1,419.47 − 1,144.58 | = 274.89 |
The principal portion grew by 1.25. That is the whole engine: each month the interest is a little smaller, so the principal share is a little bigger, and the effect accelerates because it compounds on itself.
By the final month, month 360:
| interest | = 6.48 | |
|---|---|---|
| principal | = 1,413.00 | |
| balance | = 0 |
The same 1,419.47 that once moved the debt by 273.64 now moves it by 1,413.00 — 5.2 times the work, for the same money.
What an extra 200 a month does
Add 200 to every payment. The scheduled payment does not change; the extra goes straight against the balance.
| Scheduled | With the extra | |
|---|---|---|
| Total interest | 261,010.10 | 185,394.26 |
| Months to payoff | 360 | 269 |
| Interest saved | — | 75,615.84 |
| Time saved | — | 91 months |
Paying 14% more each month clears the loan 7.6 years early and saves 75,615.84.
The reason the return is so lopsided is that an overpayment is not just 200 off the balance. It is 200 that stops accruing interest for every remaining month of the loan — 359 months of it, if you make the payment in month one. An overpayment early is a much larger object than the same overpayment late, and by the final years it is worth almost nothing, because there is barely any interest left for it to prevent.
This is the same shape as compound growth, run backwards.
The mistakes that actually cost money
Judging progress by the balance in year one. After 12 payments totalling 17,033.64, the balance has fallen from 250,000 to 246,632.28 — 3,367.72 of debt cleared for 17,033.64 paid. That is not the loan failing to work. That is what the front of an amortisation schedule looks like.
Comparing headline rates without the term. A lower rate over a longer term routinely costs more in total. The rate sets the monthly payment; the term sets how many of them there are, and the total is the product.
Overpaying late for the psychological win. The same money in year one is worth several times what it is worth in year 25. If overpaying is the plan, front-load it.
Assuming an overpayment always reduces the term. Some lenders apply overpayments by reducing the payment instead, keeping the term fixed. That saves far less interest, and it is usually a setting you have to change deliberately.
Ignoring early repayment charges. Many fixed-rate deals cap annual overpayment at a percentage of the balance and charge for exceeding it. The 75,615.84 above assumes no such charge, and that assumption is worth checking before it is worth acting on.
What this does not model
A fixed nominal rate for the whole term, which almost no real mortgage has — a fixed period followed by a variable rate is the norm, and every figure here would change at the reversion. No fees, no insurance, no early repayment charges, no offset account. Interest is compounded monthly on the outstanding balance, which is the common convention but not the only one; daily-interest mortgages differ slightly, generally in the borrower’s favour on the overpayment side.
It also does not answer the question of whether to overpay. Money used to overpay a 5.5% loan is money not invested elsewhere, and the comparison is against your realistic after-tax return, not against a hoped-for one. The arithmetic here tells you exactly what overpaying is worth. What it is worth against the alternative is a different calculation.
Every figure above is computed from the four inputs under “Your numbers”, month by month, the same way a lender’s own schedule is.