How mortgage amortisation works, and why year one is almost all interest

Most people know that early mortgage payments are mostly interest. Fewer know how lopsided the split actually is, or why it makes certain decisions — like refinancing or making extra payments — behave very differently depending on how far into the loan you are.

The formula, briefly

A fixed-rate mortgage uses the amortisation formula:

M = P × r / (1 − (1 + r)−n)

where M is the monthly payment, P is the loan amount, r is the monthly interest rate (annual rate ÷ 12), and n is the number of payments. The payment is fixed. What changes every month is the split between interest and principal.

Why the early years are interest-heavy

Interest is charged on the outstanding balance. At the start, the balance is at its largest, so the interest portion is at its largest. Your fixed payment covers that interest first, and whatever is left reduces the principal. As the balance falls, the interest charge falls, and more of the payment goes to principal.

On a $320,000 loan at 6.5% over 30 years, the payment is about $2,023. In month one, roughly $1,733 of that is interest and $290 is principal. Five years in, the split is closer to $1,540 interest and $483 principal. The crossover point — where principal finally exceeds interest — happens around year 19 on a 30-year loan at that rate.

That is not a trick or a fee. It is the arithmetic of charging interest on a declining balance.

Three consequences people miss

Extra payments early are worth far more than extra payments late

An extra $100 a month in year one attacks principal when the balance is large, so it removes interest for the entire remaining term. The same $100 in year 25 saves very little, because there is barely any interest left to avoid.

Refinancing resets the clock

Refinancing a 30-year loan in year 10 into a new 30-year loan does not just change the rate — it restarts the amortisation curve. You go back to being interest-heavy. This is why a refinance can lower the monthly payment while increasing the total interest paid. Always compare total remaining cost, not just the payment.

Selling early means you built less equity than you think

If you sell in year five of a 30-year loan, most of what you paid went to interest, and your equity is roughly your down payment plus the principal you actually repaid. This matters for anyone counting on home equity as a source of funds.

Check the numbers yourself

Our mortgage calculator shows the full year-by-year split of interest, principal and remaining balance, so you can see exactly where the crossover falls for your loan. That table is the single most useful output of the calculator — more useful than the monthly payment everyone focuses on.

What this article cannot tell you

This is mathematics for fixed-rate, fully amortising loans. Interest-only, adjustable-rate and balloon structures behave differently, and the crossover point shifts with the rate and term.