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

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.

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.

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.

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.

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