Why early mortgage payments are mostly interest

When you take out a mortgage, your monthly payment stays the same throughout the loan term. However, what changes is how that payment is split between interest and principal. In the early years, most of your payment goes toward interest, and only a small portion reduces your principal balance.

How mortgage amortization works

Mortgage payments are calculated using an amortization formula that ensures your loan is paid off by the end of the term. The formula calculates a fixed monthly payment that covers both interest and principal.

The key insight is that interest is calculated on your remaining balance. Since your balance is highest at the beginning of the loan, you pay the most interest in the early months.

A concrete example

Let's say you have a 30-year mortgage for ₮50,000,000 at 5.5% interest:

• Month 1: Your payment might be ₮283,000. Of that, about ₮229,000 goes to interest, and only ₮54,000 goes to principal.
• Month 12: Your payment is still ₮283,000, but now about ₮225,000 goes to interest, and ₮58,000 goes to principal.
• Year 15: The split is more balanced—roughly half and half.
• Year 30: Almost your entire payment goes to principal, with very little interest.

Why this matters

Understanding this breakdown helps you make informed decisions:

1. Extra payments early on have a huge impact: Since you're paying down principal, extra payments reduce your balance faster and save significant interest over time.

2. Refinancing considerations: If you're early in your loan, refinancing might make sense if rates drop, but you'll restart the interest-heavy period.

3. Long-term planning: Knowing that early payments are mostly interest helps you plan your finances and understand why it takes time to build equity.

Visualizing the shift

If you look at an amortization chart, you'll see two lines:

• Interest paid starts high and decreases over time
• Principal paid starts low and increases over time

These lines cross somewhere in the middle of your loan term, which is when you're paying equal amounts to interest and principal.

Takeaway

Your mortgage payment structure is designed this way by design—it's not a mistake or a trick. Understanding it empowers you to make better financial decisions, whether that's making extra payments, refinancing, or simply planning your long-term finances.