Calculation Methodology
Transparency is our foundation. Here we publish the exact mathematical formulas, banking conventions, and regulatory frameworks used across our calculation engines.
1. Interest-Only Mortgage Formula (UK)
An interest-only mortgage payment covers strictly the interest accrued on the outstanding loan principal during each calendar billing cycle. Under standard UK banking conventions (annual interest divided into 12 equal monthly instalments):
Monthly Interest Payment = Loan Principal × (Annual Interest Rate ÷ 100) ÷ 12 Worked Example: On a £200,000 mortgage principal with a 5.0% annual interest rate:
£200,000 × (5.0 ÷ 100) ÷ 12 = £200,000 × 0.05 ÷ 12 = £833.33 per month
Because no capital is repaid through this monthly payment, the full £200,000 capital debt remains outstanding at the end of the mortgage term and must be settled via an approved repayment vehicle.
2. Capital Repayment Amortisation Formula
To provide accurate comparisons between interest-only and traditional repayment mortgages, our engines calculate the monthly instalment using the standard fixed-rate annuity amortisation equation:
M = P × [ r(1 + r)^n ] ÷ [ (1 + r)^n - 1 ] Where:
- M: Monthly capital-plus-interest payment
- P: Mortgage principal balance
- r: Monthly interest rate (Annual Interest Rate ÷ 100 ÷ 12)
- n: Total number of monthly payments across the term (Term in Years × 12)
This formula ensures that after exactly n monthly payments, the remaining mortgage principal reaches precisely £0.00.
3. Loan-to-Value (LTV) Ratio
Loan-to-Value reflects the ratio of the mortgage borrowing relative to the appraised property purchase price or valuation:
LTV (%) = (Mortgage Principal ÷ Property Value) × 100 In the UK, residential interest-only mortgages typically require a minimum 25% deposit (maximum 75% LTV). For Retirement Interest-Only (RIO) mortgages, lenders commonly target between 50% and 60% LTV to maintain an equity buffer in later life.
4. Buy-to-Let (BTL) Stress Testing & ICR Ratios
Unlike residential mortgages assessed against borrower income multiples, UK buy-to-let lending capacity is evaluated using an Interest Coverage Ratio (ICR) stress test:
Rental Coverage (%) = [ Monthly Rental Income ÷ (Mortgage Principal × Stress Rate ÷ 12) ] × 100 Our calculator offers two industry standard benchmark toggles:
- 125% ICR: Standard industry benchmark for basic-rate (20%) individual taxpayers and Limited Company SPV borrowing.
- 145% ICR: Benchmark typically applied to higher-rate (40%) and additional-rate (45%) taxpayers to account for Section 24 mortgage tax relief restrictions.
5. Mortgage Overpayment Mechanics
When voluntary overpayments are applied to an interest-only mortgage, 100% of the overpayment is directed toward reducing the loan principal. In subsequent months, the monthly interest charge is recalculated against the newly reduced principal balance:
Revised Monthly Interest = (Principal - Accumulated Overpayments) × (Annual Rate ÷ 100) ÷ 12 This demonstrates both direct capital reduction and compounding lifetime interest savings. Most UK lenders allow up to 10% annual overpayments penalty-free; borrowers must confirm exact Early Repayment Charge (ERC) terms in their mortgage contract.
6. Authoritative UK Financial Sources
To verify economic assumptions, monetary policy, and consumer rights, we reference authoritative public resources: