In short
- Each payment mixes interest and principal; at the start interest weighs more.
- A longer term lowers the payment but makes the total much more expensive.
- Paying off early to shorten the term usually saves more interest than lowering the payment.
How the payment is calculated
Most mortgages have a fixed monthly payment (an amortizing loan). It depends on three figures: the amount borrowed, the interest rate and the term. Each payment splits into two parts: the month's interest, worked out on the outstanding balance, and the principal, which is what reduces the debt.
A worked example
| Amount · fixed rate | €180,000 · 3% |
| Payment over 25 years | €853.58 a month |
| First payment | €450 of interest and €403.58 of principal |
| Total interest | €76,074 |
At the start most of the payment is interest, because the debt is large. Over the years the split reverses.
Term: a lower payment, more interest
A longer term lowers the payment, but you stay in debt longer and pay more interest. With the same loan:
- Over 20 years: €998.28 a month and €59,586 of interest.
- Over 30 years: €758.89 a month and €93,199 of interest.
Choose the term by looking at both the payment you can comfortably afford and the total cost.
Paying off early
If you pay off principal early, you can lower the payment or shorten the term. With the same rate and no fees, shortening the term usually saves more interest because the debt falls faster. Check your contract for any prepayment fee.
Work it out with your numbers
The calculator gives you the payment, the full amortization schedule and the effect of extra payments.