Why your first five years barely move the balance

Almost every first-time buyer we speak to has the same reaction to their first annual statement: they have paid £16,542 and the balance has moved by £5,927.

Nothing has gone wrong. That is what a repayment mortgage does.

The arithmetic

Interest is charged on what is outstanding. On a £256,050 balance at 4.19%, the first month’s interest is £894. The payment is £1,379. So £485 comes off the loan and £894 goes to the lender, and the next month’s interest is charged on £255,565 instead, which is very slightly less.

That “very slightly” compounds in your favour for 300 months. By around month 110 more than half of each payment is going on the balance. By month 280 almost all of it is.

What follows from it

The rate matters most when the balance is highest, which is now. A rate that is half a point better saves you more in the first five years than in the last ten, because there is more balance for it to act on. The repayment calculator shows the half-point saving for your own numbers.

A short fix is not automatically cheaper. A two-year fix at 4.29% can beat a five-year at 4.09% for twenty-four months and then put you back in the market at whatever rates happen to be. That is a view on interest rates, and if you do not have one, say so. It is a perfectly good reason to fix for longer.

Overpayments are worth the most early. £200 a month from month one takes about five years off a 25-year term on this case. The same £200 started in year fifteen takes about twenty months off it.

What we would ask you

How long do you expect to stay in the house, and could you cope if the payment rose by £200 a month in two years’ time? Those two answers decide the length of fix more often than the rate does.