Mortgage interest is calculated on the remaining loan balance, not on the original amount forever. That is why interest is highest early in the loan and falls over time.
What mortgage interest means
Mortgage interest is the fee you pay for borrowing money. Lenders charge interest on the outstanding balance, and your monthly payment includes both interest and principal. Because the balance is larger in the early years, the interest portion is larger too.
Monthly interest formula
Most mortgages use a fixed monthly rate derived from the annual rate.
- Monthly interest rate = Annual rate / 12
- Monthly interest = Outstanding balance x Monthly rate
If your balance is $300,000 and your annual rate is 6.5%, the monthly rate is 0.065 / 12 = 0.0054167. First-month interest is about $1,625.
Step-by-step example
- Convert the annual rate to a monthly rate.
- Multiply the monthly rate by the current balance to get interest for the month.
- Subtract that interest from your fixed monthly payment to get the principal paid.
- Reduce the balance by the principal portion.
- Repeat for each month.
This is why your interest shrinks over time. Each payment lowers the balance, which lowers the next month interest.
How amortization changes the payment split
Amortization keeps the monthly payment fixed but changes the split. Early payments are interest-heavy. Later payments are principal-heavy. This is normal and is exactly how a standard mortgage works.
How to reduce total interest
- Make extra payments early in the loan term.
- Choose a shorter tenure if your cash flow allows it.
- Refinance to a lower rate when it saves more than the switching costs.
Useful calculators
Use the mortgage calculator to see the full schedule, the extra payment calculator to measure interest savings, and the refinance calculator to check break-even.