Money habits
Tracking a mortgage properly: capital, interest, and what a house really costs
Booking the whole payment as an expense overstates what your home costs, by a share that changes every year. Here is the split, and what else it costs.
A mortgage payment is the largest, most regular transaction most households ever make, and almost everyone records it wrong.
Not carelessly. The obvious thing is to enter the amount that left your account and call it housing. It is one payment, it goes out on the same day every month, and it is unambiguously about the house. Treating it as an expense feels like the only honest reading.
It is two payments wearing one coat, and the two halves are opposites.
The two halves
Part of the payment is interest. That is the price of having borrowed the money. It is gone, it bought you nothing you still hold, and it is an expense in the strictest sense.
The rest repays capital. That part reduces what you owe. Your debt falls by exactly that amount, so your net worth rises by exactly that amount. Nothing was consumed. Money moved from your current account to the other side of your own balance sheet.
That is not spending. It is saving, and it is one of the most reliable forms of it, because it happens whether or not you feel disciplined that month.
So the single line you are entering is an expense and a saving, glued together by the bank’s convenience.
Why the error grows
Here is what makes this worse than an ordinary mistake.
A mortgage does not split its payment the same way twice. Early in the term the balance is large, so the interest is large, and almost nothing goes to capital. Late in the term the balance is small, the interest is small, and almost all of it is capital. The payment stays the same; what is inside it inverts.
Book the whole thing as housing cost and your housing cost is overstated by the capital portion. In year one that portion is small and the error is minor. Fifteen years in it is most of the payment and the error is enormous.
The part that actually damages you is the middle. Your recorded housing cost stays flat, because the payment is flat, while your true housing cost is falling every year. So your year-on-year comparison shows nothing changing while something changes a great deal. The trend you are looking at is an artefact of the recording, not a fact about your life.
An error that is constant can be lived with. An error that moves, in one direction, over decades, quietly corrupts the one thing a long ledger is for.
Getting the split
Three ways, in order of how much work they are.
Read it off the statement. Most lenders show the interest and capital breakdown on every statement, or in the app, or on an annual summary. If yours does, that is the answer and there is nothing to compute. Take the two numbers.
Ask for the amortisation schedule. The full table, every month to the end of the term, with the split on each row. Lenders produce these and will send you one. It is the best possible outcome because it lets you enter the split in advance and stop thinking about it.
Compute it. If neither of the above works:
- Interest this month is your outstanding balance multiplied by the annual rate divided by twelve.
- Capital this month is the payment minus that interest.
- Next month’s balance is this month’s balance minus the capital.
Repeat. That is the entire mathematics of a repayment mortgage, and a spreadsheet does the whole term in one dragged formula.
Two warnings on computing it yourself. A variable or tracker rate means the interest changes when the rate does, so a schedule you built in year one stops being right the moment your rate moves. And some lenders charge interest daily rather than monthly, which produces small differences your reconcile will find. If the numbers drift by a few units a month, that is usually why, and it is what an adjustment entry is for.
What else a house costs
The payment is not the cost of owning. It is one of several, and for many households it is not even the largest once the interest portion shrinks.
The recurring ones, all genuine expenses:
- Service charge or community fees. In an apartment this can rival the interest, and unlike the interest it never goes down.
- Property tax, whatever your country calls it.
- Building insurance, which the lender usually requires anyway.
- Maintenance. The one everybody forgets. A boiler, a roof, a bathroom that finally has to be done. Individually unpredictable, collectively very predictable, and the honest way to carry it is a monthly figure you put aside rather than a shock every few years.
- The empty months, if you rent it out.
None of these is inside the mortgage payment. So a household that tracks only the payment believes its house is cheaper than it is, and at the same time believes its housing cost is higher than it is. Two errors pointing opposite ways, which is exactly why the totals can look plausible while both parts are wrong.
What buying it cost is not what it is worth
There is a second trap, at purchase rather than monthly.
Buying a property costs a large amount that does not go to the seller. Transfer tax or stamp duty, notary, land registry, agent commission, mortgage arrangement fees, valuation, legal advice. Depending on the country this is anywhere from two to fifteen per cent of the price.
The temptation is to add all of it to the value of the asset, on the reasoning that it is what the house cost you. It is not what the house is worth, and the difference is the whole point of a balance sheet.
Those fees bought you a transaction, not a building. They are an expense of buying, they are gone, and if you sold the next morning you would not get them back. Adding them to the asset is how a household spends a decade believing it is ahead. The number it compares against was inflated on day one.
Record the property at what it is worth. Record the fees as what they were: a one-off cost of a decision you made.
Overpaying
If you pay more than the scheduled amount, the extra goes entirely to capital.
That means an overpayment is pure saving. Not a bit of it, all of it. It is one of the few things a household can do where the return is certain in advance. Paying down a loan at four per cent is a guaranteed four per cent, tax free, with no market risk. Very little else offers that.
Record it as a transfer to your balance sheet, the same as the capital portion. Your savings rate will then tell the truth about the month you did it. Record it as an expense and you will have made yourself look reckless in the month you were most prudent.
A mortgage in a currency you do not earn
This is the sharp edge, and it is mine.
I hold a euro mortgage on a property in a country where nobody in this house lives any more, and it is paid out of a salary in dirhams. Every month the euro amount is fixed and the dirham amount is not.
Two separate things happen, and they must not be recorded as one:
The payment converts. What leaves the dirham account varies with the rate. That is a real cash movement and it belongs in the ledger at what actually left.
The debt revalues. The outstanding balance is a number in euros. Expressed in your base currency it moves every month, by a lot, for reasons that have nothing to do with whether you paid. In a bad quarter the currency can add more to what you owe than a year of capital repayments took off it.
That second one is not a payment, not an expense and not a saving. It is a translation effect, and it needs its own line or it will contaminate everything around it. Fold it into your housing cost and your housing cost becomes a currency chart. Fold it into your savings and you will conclude that a month you saved hard was a month you went backwards.
Almost nothing written about mortgages covers this, because almost everything written about mortgages assumes you earn and owe in the same money. Plenty of people do not.
The asymmetry nobody mentions
One last thing, and it is a useful habit of mind.
On your balance sheet a house has two entries facing each other. The asset is what the property is worth, which is an estimate you chose, defensible at best and flattering at worst. The liability is what you owe, which the bank knows to the cent and will tell you.
One side is a guess and the other is a fact.
That is worth remembering whenever the equity looks good, because all of the movement in that number comes from the side you made up. Revalue rarely, revalue downward as readily as upward, and treat a rising estimate with the suspicion you would apply to anyone else’s.
The short version
- Split every payment. Interest is an expense, capital is saving.
- Get the split from the lender if you can. Compute it only if you must.
- Budget the service charge, the tax, the insurance and the maintenance separately. They are the cost of owning and the payment does not contain them.
- Purchase fees are an expense, not value. Never add them to the asset.
- Overpayments are entirely capital, so entirely saving.
- If you owe in a currency you do not earn, give the revaluation its own line.
- The asset side is your estimate and the liability side is a fact. Only one of them is trying to flatter you.
Do the first of those and your housing cost stops being wrong by a moving amount. Everything else on this list is smaller, and all of it is still worth having.