How interest-only mortgage payments are worked out
The formula, monthly payments for common loan sizes, the comparison with repayment, and the savings needed to clear the loan.
If you know what you can afford each month, you can work backwards to the loan that payment would repay. At an example rate of 4.5% over 30 years, £2,000 a month repays about £394,700 and £3,000 a month repays about £592,100.
That is the arithmetic. Whether a lender will actually lend you that much is a separate question, and usually the bigger limit. Both are covered below.
What each monthly payment buys
The loan a repayment mortgage payment supports over 30 years, at four example rates.
| Monthly payment | 4% | 4.5% | 5% | 5.5% |
|---|---|---|---|---|
| £1,000 | £209,461 | £197,361 | £186,282 | £176,122 |
| £1,500 | £314,192 | £296,042 | £279,422 | £264,183 |
| £2,000 | £418,922 | £394,722 | £372,563 | £352,244 |
| £2,500 | £523,653 | £493,403 | £465,704 | £440,304 |
| £3,000 | £628,384 | £592,083 | £558,845 | £528,365 |
The rate matters a lot. At £2,000 a month, the difference between 4% and 5.5% is over £66,000 of borrowing.
A shorter term means a smaller loan
Over 25 years instead of 30, the same payment repays less, because there are 60 fewer payments. At 4.5%, £2,000 a month over 25 years repays £359,821, about £35,000 less than over 30 years. You pay less interest overall, though, so a shorter term is cheaper if you can manage it.
The limit lenders actually use
Lenders mainly decide how much to lend from your income, not from the payment you say you can afford. Many will lend up to about 4.5 times income, sometimes more for higher earners, and the Bank of England limits how many mortgages lenders can make at 4.5 times income or more. They also check you could keep paying if rates rose, and take off what you already pay out on loans and credit cards.
So it helps to turn the loan back into the income it would need at 4.5 times.
| Monthly payment | Loan at 4.5% over 30 years | Income needed at 4.5 times |
|---|---|---|
| £1,000 | £197,361 | £43,858 |
| £1,500 | £296,042 | £65,787 |
| £2,000 | £394,722 | £87,716 |
| £2,500 | £493,403 | £109,645 |
| £3,000 | £592,083 | £131,574 |
For a joint application this is the combined income. If your income is below these figures, your borrowing will usually be capped by income before it is capped by the payment. The mortgage affordability calculator works it out from your income and commitments, and the income needed calculator runs it the other way, from the price of the home.
Adding your deposit
The price you can buy at is the loan plus your deposit. With £2,000 a month at 4.5% over 30 years and a £40,000 deposit, that is £394,722 plus £40,000, so about £434,700, at 90.8% loan to value. A bigger deposit lowers the loan to value, and lower loan to value bands generally come with better rates.
Work out your own figure
Put your payment, rate, term and deposit into the mortgage from monthly payment calculator. It shows the loan, the price it buys and the loan to value. Then check the result against your income with the affordability calculator, and take the lower of the two.
This is general information, not financial or tax advice.
It explains published rules and figures. Your own position depends on your full circumstances,
so speak to a qualified adviser before acting on it.