Guide · United Kingdom
How Mortgage Payments Are Calculated: Formula Guide
By Muhammad Adeel, Founder · Last updated 2026-10-11 · Published 2026-06-27
See the exact formula behind your monthly mortgage payment with worked numbers showing principal vs interest each year. Free calculator included.
The Standard Mortgage Amortization Formula
Every fixed-rate mortgage repayment is computed using a standard compound interest formula. This formula ensures that over a set term (such as 25 or 30 years), you make equal monthly payments that completely pay off both the loan principal and all interest accrued.
The formula is written as: M = P * [r(1+r)^n] / [(1+r)^n - 1]
Where: M is your monthly payment, P is the principal loan amount, r is the monthly interest rate (annual interest rate divided by 12 months), and n is the total number of payments (loan term in years multiplied by 12).
Principal vs. Interest: The Shifting Balance
In the early years of a mortgage, your loan balance is at its highest, meaning that most of your monthly payment goes toward paying off the interest. Only a small fraction goes toward reducing the principal balance.
As the years progress and the principal is chipped away, the interest charge decreases. Consequently, a larger percentage of your monthly payment goes toward the principal. By the final years of your mortgage, almost your entire payment is dedicated to principal repayment.
How Extra Payments Speed Up Repayment
Because interest is calculated based on your remaining principal, any extra payment you make goes directly toward reducing the principal balance. This reduces the base on which future interest is calculated.
By making even small overpayments, you can shave years off your mortgage term and save thousands in interest costs. However, check your lender's policy as many restrict overpayments to 10% of the balance per year before penalties apply.
How to Calculate Principal Paid on a Mortgage
If you want to know how much of your loan you have actually paid down, the math is simple once you have your monthly payment. Each month: principal paid = monthly payment minus that month's interest charge. The interest charge for the month is your outstanding balance times your monthly rate (annual rate divided by 12). Take a 350,000 dollar loan at 6.5% with a monthly payment of 2,212.24 dollars. Month one works like this: interest = 350,000 x 0.065 / 12 = 1,895.83 dollars, and principal paid = 2,212.24 - 1,895.83 = 316.41 dollars. That 316.41 dollars is the only part of the payment that reduces what you owe.
The split shifts every month because interest is always charged on the remaining balance. Here is how one loan, 350,000 dollars at 6.5% over 30 years, divides each year between interest and principal. Year 1: 22,635 dollars interest, 3,912 dollars principal, balance 346,088 dollars. Year 5: 21,477 dollars interest, 5,070 dollars principal, balance 327,638 dollars. Year 10: 19,536 dollars interest, 7,011 dollars principal, balance 296,716 dollars. Year 15: 16,852 dollars interest, 9,695 dollars principal, balance 253,957 dollars. Year 20: 13,141 dollars interest, 13,406 dollars principal, balance 194,828 dollars. Year 25: 8,008 dollars interest, 18,538 dollars principal, balance 113,065 dollars. Year 30: 912 dollars interest, 25,635 dollars principal, balance zero.
The early-years shock is real. After five years of paying about 2,212 dollars a month (132,750 dollars total), you have paid down only 22,362 dollars of principal. The rest, about 110,388 dollars, went to interest. This is not a trick; it is how amortization works. The interest portion dominates while the balance is large, and the principal portion only takes over in the second half of the loan, crossing 50% of each payment around year 20.
The one-line formula to remember: principal paid this month = M - (B x r / 12), where M is your monthly payment, B is your current balance, and r is your annual rate. Repeat it each month on the shrinking balance and you have the full amortization schedule.
Extra payments attack the interest-heavy early years directly, because every extra dollar skips the interest queue and reduces the balance that future interest is charged on. Add 200 dollars a month to the same 350,000 dollar loan and the term falls from 30 years to about 23.8 years, while total interest drops by roughly 106,500 dollars.
Sources
The figures and policy details in this article come from the following primary sources, checked at the time of writing.
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Go to calculator →Frequently asked questions
How do lenders calculate interest?
Most lenders calculate interest daily. They multiply the outstanding principal balance by your annual interest rate and divide it by 365. These daily charges are compiled and added to your balance monthly.
Does a 15-year mortgage save money compared to a 30-year one?
Yes, significantly. A 15-year mortgage has higher monthly payments, but you pay off the principal twice as fast, which prevents interest from compounding over a longer period. This typically saves you tens of thousands of dollars in total interest.
How do I calculate the principal paid on my mortgage?
Subtract that month's interest charge from your monthly payment. The interest charge is your current balance times your annual rate divided by 12. On a 350,000 dollar loan at 6.5% with a 2,212.24 dollar payment, month one's interest is 1,895.83 dollars, so the principal paid is 316.41 dollars. The principal portion grows each month as the balance shrinks.
Why is the principal portion so small in the early years?
Because interest is charged on the full outstanding balance. On a 350,000 dollar loan at 6.5%, only about 3,912 dollars of your first year's 26,547 dollars in payments reduces the balance; the rest is interest. The principal share crosses 50% of each payment around year 20 and dominates the final decade.
Educational content only - not mortgage, tax, or legal advice. Confirm any decision with a licensed professional in your jurisdiction.