When you think about your mortgage repayments, you’ll probably see it as paying for your home. But actually a lot of the money goes towards paying the interest.
This is for two reasons.
One, mortgages are for large sums of money, so the interest charges, especially when you first take out a mortgage, are large. For the same interest percentage rate, larger sums of money get higher interest charges than smaller sums.
Two, mortgages last for many years, so the interest has a long time to grow.
That’s why the interest rate is so important, and why a shorter mortgage can be better. But, no matter the deal you get, lots of your money will be spent on the interest on your mortgage.
Here’s an example.
The average UK house price is ££255,535 according to HM Land Registry. If you had one of the average interest rates, say 3.53% for a Standard Variable Rate (source: Bank of England), here’s how your mortgage costs would work out over a 25-year mortgage.
House price: £255,535
Mortgage length: 25 years
Interest rate: 3.53%
Total amount repaid: £385,108
Total paid in interest: £129,573
If you had a slightly lower interest rate, maybe the 1.73% rate* for a 3-year fixed rate mortgage, you would actually pay around £70,000 less in interest:
House price: £255,535
Mortgage length: 25 years
Interest rate: 1.73%
Total amount repaid: £314,810
Total paid in interest: £59,275
*Source: Statista 2021 stats
If the exact same mortgage was for a 30-year term though, the amount you pay in interest goes back up again:
House price: £255,535
Mortgage length: 30 years
Interest rate: 1.73%
Total amount repaid: £327,570
Total paid in interest: £72,035
In these examples, the interest totals are worked out as if the interest stays the same. In real life, the interest rates on your mortgage could go up every time you remortgage – so every 2, 3 or 5 years, depending on when you change. If you don’t get a new mortgage, the interest rate will reset to the Standard Variable Rate. All this means that in real life, the total amount you repay on your mortgage could be tens of thousands of pounds higher.
And this is why the average total cost including interest of a mortgage is difficult to spell out. On the average house in the UK, using the average mortgage interest rates, you could repay between £314,810 and £385,108 in total – and if interest rates go up over time, that figure could be £400,000+.
So, it’s important you keep checking your mortgage deal, and keep track of your payments. If you get in trouble with payments, there are places to go to get help.