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Repayment vs interest-only mortgages: Which should you choose?

Rory McGrellis Staff Photo

Rory McGrellis

Content Writer
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At a glance

  • With repayment mortgages, borrowers pay off both interest and the loan itself meaning by the end of the term they will own their property outright.
  • Alternatively, interest-only mortgages see borrowers only pay back the interest, meaning the loan will need to be settled via other means.

What is a repayment mortgage?

Repayment mortgages (also known as capital and repayment mortgages) require borrowers to pay back both a small part of the loan as well as the interest each month, and nowadays are the most common deal for homemovers.

Under this arrangement, borrowers initially pay very little towards their home and mostly pay interest. However, as the term progresses, this ratio gradually changes as borrowers make more headway in paying off the loan.

Though this means higher monthly repayments compared to an interest-only deal, by the end of the mortgage, borrowers should have paid off the entirety of the loan and will own their property outright.

 

Moneyfacts tip

Moneyfacts tip Rory McGrellis Staff Photo

As you pay off your mortgage, you should be able to move to lower loan-to-value (LTV) products, which should help you qualify for deals with lower interest rates. That’s why it's worth considering remortgaging regularly.

Pros and cons of repayment mortgages

  • You’ll own your home outright by the end of the mortgage term.
  • You pay less interest as you whittle down your outstanding loan, which could mean paying less interest overall compared to an interest-only mortgage.
  • As already mentioned, as you increase your house equity, you may qualify for better deals should you choose to remortgage.
  • As you’re paying back both a portion of your loan and its interest, monthly costs are likely to be larger compared to interest-only mortgages.
  • Borrowers may feel disheartened at how slowly the loan is paid off early on in the term.

What is an interest-only mortgage?

An interest-only mortgage, as its name suggests, requires borrowers to only pay back the interest on their loan each month. Buy-to-let mortgages tend to be interest-only, for example.

However, be aware you’ll still need to pay off the original loan at the end of the term. As a result, it’s worth having a repayment plan in mind before considering taking out this sort of mortgage.

This could include using your savings or investing throughout the mortgage term, or using the proceeds from selling the property, though remember these options all come with the risk of not being enough to cover the loan.

Pros and cons of interest-only mortgages

  • These mortgages typically have lower monthly payments compared to a repayment mortgage.
  • Your repayment plan could perform better than expected, leaving you in profit after paying back the loan.
  • The majority of buy-to-let mortgages are interest-only, which can help landlords manage multiple properties.
  • At the end of the term, you’ll still be responsible for paying off the loan, which may be harder to manage as a lump sum.
  • You won’t build up any equity during the term, giving you fewer options when applying for other loans or large purchases later down the line.
  • It can be hard to maintain your repayment plan, which is why many lenders will ask you to provide evidence that your investments are performing well during your term.
  • As interest-only mortgages present a greater risk to lenders, they often employ strict criteria which makes it harder to get accepted.

Find the right deal for you

While our mortgage charts mainly show repayment mortgages, you can use our ‘Full Search’ feature to exclusively compare interest-only mortgages as well as a variety of other filters.

Difference between interest-only and repayment mortgage

As you’re only paying back the interest each month, an interest-only mortgage is likely to work out cheaper each month compared to a conventional repayment mortgage, at least at first.

However, while those paying off both their loan and interest might feel they’ve pulled the short straw, remember that they’re slowly increasing their house equity, and will own the property outright by the end of the term. Meanwhile, interest-only borrowers must pay off a large chunk of capital after their mortgage ends, which usually ends up costing more overall.

For example

You can see the difference in costs for each type of mortgage using our mortgage repayment calculator.

For instance, when borrowing £250,000 over 25 years at a rate of 4.00%, the monthly cost with a repayment mortgage comes to £1,319.59. This equates to paying £395,877 over the full term, meaning you pay back £145,877 in interest.

Meanwhile, the same deal under an interest-only mortgage works out £486.26 less expensive per month at £833.33, meaning you’d pay a total of £249,999 over the 25 years. However, you’ll need to also pay back the original £250,000, meaning you’d be £104,122 worse off in the long run.

Part and part mortgages

You may not be able to afford a mortgage on full repayment, or you may have an under-performing investment. In this instance, you could have part of your mortgage on repayment and part of it interest-only, with the two halves operating in the same way as described above. This is known as a part and part mortgage.

If you're looking at this option due to concerns about affording your mortgage, make sure you still have a plan. If you can't afford your mortgage, consider a less expensive property, or make sure you have a clear idea on how you’ll eventually pay the entire mortgage off before taking out the loan.

 

Should I choose an interest-only or repayment mortgage?

Sadly, there is no definitive answer as to what type of mortgage is best as this largely comes down to individual circumstances.

If you can afford the higher monthly costs, a repayment deal could take away the stress of having to pay off your loan at the end of your term, though those with a solid repayment plan could also benefit more from an interest-only option.

 

Can I change my interest-only mortgage to repayment?

Yes, you can change an interest-only mortgage to a repayment deal, though the specific criteria for doing so can vary depending on the lender as well as your financial situation.

Usually this will involve affordability checks to ensure you’ll be able to afford your new monthly payments, which are likely to rise as you begin to pay off your loan as well as the interest, so keep this in mind when budgeting your money.

This being said, if the value of your property has risen considerably since taking out your original deal, you could be eligible for a lower LTV on your new mortgage and more favourable interest rates as a result.

Conversely, lenders may be more reluctant when switching from repayment mortgages to interest-only deals; however, they are required to grant such requests to struggling borrowers (provided they are up to date with their payments) for up to six months under the Mortgage Charter.

What is the Mortgage Charter?

Introduced in June 2023, the Mortgage Charter is a set of commitments agreed upon by participating lenders to help support struggling borrowers concerned about rising interest rates or other financial challenges.

This includes:

  • Not forcing them to leave their home without consent (unless in exceptional circumstances) less than a year after the first missed payment.
  • Giving borrowers the chance to lock into like-for-like or better deals up to six months before the end of their current fixed term.
  • As previously mentioned, the ability for borrowers, up to date with their payments, to temporarily switch to an interest-only deal for up to six months, or to extend their current term to reduce monthly payments. This includes the option to revert to their original term within six months.

This decision should be considered carefully, as you’ll be increasing the overall cost of your mortgage, so it could be worth seeking advice from a mortgage broker first if you’re at risk of falling behind on your payments.

 

Should I speak to a mortgage broker?

Mortgage brokers remove a lot of the paperwork and hassle of getting a mortgage, as well as helping you access exclusive products and rates that aren’t available to the public. Mortgage brokers are regulated by the Financial Conduct Authority (FCA) and are required to pass specific qualifications before they can give you advice.

 

Speak to an award-winning mortgage broker today

 

MAB is the preferred mortgage broker of MoneyfactsCompare

 

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two pairs of hands holding a small plastic house

At a glance

  • With repayment mortgages, borrowers pay off both interest and the loan itself meaning by the end of the term they will own their property outright.
  • Alternatively, interest-only mortgages see borrowers only pay back the interest, meaning the loan will need to be settled via other means.

Moneyfactscompare.co.uk will never contact you by phone to sell you any financial product. Any calls like this are not from Moneyfacts. Emails sent by Moneyfactscompare.co.uk will always be from news@moneyfacts-news.co.uk. Be ScamSmart.

Moneyfactscompare.co.uk will never contact you by phone to sell you any financial product. Any calls like this are not from Moneyfacts. Emails sent by Moneyfactscompare.co.uk will always be from news@moneyfacts-news.co.uk. Be ScamSmart.