Why are the first years of a mortgage payment mostly interest?

A mortgage is a loan to buy property, secured on the property itself. If the borrower fails to repay, the lender has a legal way to take possession and sell it. The word comes from a medieval Law French term meaning death pledge: the pledge dies when the debt is paid, or when the property is taken. Few people have enough savings to buy a home outright, so mortgages fund many home purchases, and lenders usually ask the borrower to put down a portion of the cost first.

The basic arrangement is a fixed monthly payment over ten to thirty years, which slowly pays down the principal, the amount borrowed, in a process called amortization. In the UK and US, the usual maximum is 25 to 30 years. Each month the payment is split into two parts: interest on what is still owed, and a repayment of principal.

Here is the surprise. In the early years the repayments are mostly interest, and towards the end they are mostly principal. The reason is simple arithmetic: interest is worked out on the balance still owed, and at the start the balance is at its biggest. So the interest part is large and little is left to reduce the balance. As the balance shrinks, interest each month shrinks too, and more of the same payment goes to principal.

In one worked example, the first payment of a 30-year mortgage sends about 80 to 90 percent towards interest, and the lopsidedness lasts through the first 18 years. The split does not even out until payment 257, over two thirds of the way through.

This also explains what happens when someone pays extra. Paying more than the contractual amount lowers the balance and so the interest owed. If the payment stays the same, the loan ends sooner.