How is mortgage interest calculated?

When you take out a mortgage, you’re not just repaying the amount you borrowed — you’re also paying interest. That interest is the lender’s charge for lending you the money, and it makes up a significant chunk of your monthly payments.

But how is mortgage interest calculated, exactly? It’s a common and important question, because understanding it can help you plan better, compare deals properly, and save money over time.

This guide breaks down how mortgage interest is calculated in the UK, what daily interest really means, and what it means for your monthly payments.

Take the first step to your dream home

Interested in finding out how much you could borrow? Get a personalised Mortgage in Principle from OneDome in minutes. It’s free, fast and won’t impact your credit score.

Get your free mortgage in principle

Start with the basics: interest rates & capital balances

To understand how mortgage interest is calculated, there are two key components:

The interest rate
This is the annual percentage rate (e.g. 4% 5.5%) charged by the lender on the money you’ve borrowed.
The capital balance
This is the actual amount of money you still owe on your mortgage loan at any given time.

Crucially, mortgage interest is almost always calculated based on your outstanding capital balance. As you pay off some capital (on a repayment mortgage) the balance reduces. This means the amount of interest charged should also gradually decrease over time.

How is mortgage interest calculated? The daily rate

While interest rates are usually advertised as an annual figure, most mortgage lenders in the UK actually calculate the interest you owe on a daily basis.

Here’s how it typically works:

Your annual interest rate is divided by 365 to get the daily rate.
This daily rate is multiplied by your outstanding mortgage balance.
The lender adds up each day’s interest to calculate your monthly interest cost.

This method means any repayments or overpayments reduce your interest almost immediately — great news if you’re planning to pay extra.

How does this impact your monthly payment?

If you’re on a repayment mortgage, your monthly payment is split between:

The interest charged for that month, and
A portion that goes towards reducing the capital.

In the early years, a bigger chunk covers interest. Over time, as your balance shrinks, more of your payment goes towards the capital — a process known as amortisation.

If you’re on an interest-only mortgage, your monthly payments only cover interest, and the capital must be repaid later in full.

How is mortgage interest calculated: An example

Let’s imagine a very simplified scenario (actual calculations are more precise and factor in the exact number of days per month):

Outstanding mortgage balance = £100,000
Annual interest rate = 3.65%

That gives a daily rate of 0.01%.
On Day 1, the interest is £10.00.

Over a 30-day month:
Interest = £300

If your total monthly payment is £1,000, then:
£300 = interest

£700 = capital repayment

Next month, your balance is £99,300, so interest is now £9.93 per day — or £297.90 per month. And so the cycle continues.

What about different rate types? (Fixed vs Variable)

The method of how mortgage interest is calculated usually stays the same — but the interest rate itself can change depending on the type of mortgage.

Fixed-Rate Mortgage: Interest rate stays the same for a set period (e.g. 5 years).
Variable-Rate Mortgage: The rate can go up or down based on the Bank of England’s base rate or the lender’s Standard Variable Rate (SVR).

Why Understanding Interest Matters

Knowing ‘how IS mortgage interest calculated?’ helps you:

See how much of your monthly payment goes to interest vs capital.
Understand how overpayments reduce your capital and save interest.
Interrogate mortgage illustrations and calculators with more confidence.

OneDome is here to help

Choosing a mortgage is complex but OneDome is here to help. If you have any questions about the specifics of mortgages, the wider mortgage process or want tailored advice on the different types of mortgages that suit your situation you can:

Important: Your home may be repossessed if you do not keep up repayments on your mortgage.