When you take out a mortgage, the lender charges you interest on the amount you borrow. Your monthly payment covers two things: a portion that pays down the loan principal and a portion that pays the interest charged for that month.

The Formula

The standard fixed-rate mortgage payment formula is:

M = P × [r(1+r)ⁿ] / [(1+r)ⁿ − 1]

  • M = Monthly payment
  • P = Principal loan amount
  • r = Monthly interest rate (annual rate ÷ 12)
  • n = Total number of payments (years × 12)

Example Calculation

Suppose you borrow £250,000 at a 5% annual interest rate for 25 years:

  • P = 250,000
  • r = 0.05 / 12 = 0.004167
  • n = 25 × 12 = 300

Plugging into the formula gives a monthly payment of approximately £1,461.

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