Interest-Only Vs Repayment Mortgage

See how a Broker can help you decide which is better between an Interest only loan and a capital repayment mortgage

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Home Interest Only Mortgages Interest-Only Vs Repayment Mortgage
Pete Mugleston

Author: Pete Mugleston

Mortgage Advisor, MD

Jon Nixon

Reviewer: Jon Nixon

Director of Distribution

Updated: March 15, 2024

How we reviewed this article:

Our experts continuously monitor changes in the financial space and work closely with qualified mortgage advisors for factual verification.

March 15, 2024

Committing to a mortgage is a huge step and choosing between a capital repayment and interest-only mortgage can be a complicated decision, with both options having pros and cons depending on your personal circumstances.

In this article we’ll take you through the benefits of each, plus you can use our repayment versus interest-only mortgage calculator to estimate your repayments.

What’s the difference between capital repayment and an interest-only mortgage?

As you might expect from the name, with an interest-only mortgage you pay back just the interest on the capital every month until the end of the term when you then need to repay the original capital amount in full.

With a capital repayment mortgage your monthly payments are made up of a mix of interest and capital, meaning that total debt is decreasing over the term of the loan, leaving no capital left to pay at the end.

What are the benefits and drawbacks of each type?

The primary benefit of an interest-only mortgage is that your monthly payments will be much lower, as you are only paying the interest and nothing towards the capital. This can be useful in situations where you have a plan in place to pay off the capital in the long term, such as a buy-to-let investment or a plan to downsize in retirement and use the proceeds to pay off the original mortgage.

The lower monthly repayments can make budgeting easier, but don’t forget that you will need a repayment vehicle in place and this could mean paying into savings or investments alongside the mortgage.

While the monthly payments on a capital repayment mortgage are significantly higher, you benefit from reducing the capital loan amount as you go and therefore bringing down the overall cost of the mortgage over its lifetime. A repayment mortgage also cuts out any of the risks associated with your repayment vehicle.

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When is it better to have interest-only over capital repayment?

Although an interest-only mortgage is more expensive overall, there are plenty of instances when it can be a great option:

  • For buy-to-let investments, where you want to keep monthly overheads low and you have the backing of a solid property portfolio as a repayment vehicle.
  • If you’re planning on downsizing when you retire, and will use the sale of your property to pay off the loan.
  • As a retirement interest-only mortgage, where the capital is paid off when you die and the property is sold, rather than on a fixed end date.
  • Where you have an expected lump sum coming in the future e.g. another property sale or inheritance that gives you a secure repayment vehicle.
  • Where your income is currently low, but you know it will increase. An interest only mortgage means you can afford to borrow more, with a plan to switch to repayment when your earnings go up.
  • As a short-term measure during property restoration or renovation or the establishment of the new business.

Compare your repayments

One of the most important questions you’ll have when it comes to choosing between a repayment and an interest-only mortgage is how much it will cost. There are two things to consider here – your monthly repayments and the total amount repayable.

Try our calculator below to get a monthly cost comparison between interest only and a repayment mortgage.

Mortgage Repayment Calculator

This calculator can tell you the monthly and overall cost of your mortgage, based on the loan amount, interest rate, and term length.

Enter the amount you're borrowing
Enter the mortgage rate, 5.5% is a typical rate currently but this can vary
Enter the mortgage term, 25 years is the average but lenders can offer shorter and longer terms

Your Results:

The monthly repayments on a mortgage would be

The total amount paid at the end of your mortgage term would be

Get started with an expert broker to find out how much they could help you save on your mortgage repayments.

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How a mortgage broker can help you decide which option is best for you

Choosing between an interest-only and a capital repayment mortgage isn’t always easy, especially when there are so many options that seem to straddle both, such as part-and-part mortgages or mortgages with initial interest-only periods. A broker is invaluable here to help assess your own unique circumstances and help you work out exactly which mortgage is best for you.

Once you’re happy with your choice, your broker can use their extensive knowledge of the market to find the lenders who will offer you the very best rates. Having someone in the know negotiate on your behalf can save you a lot of time and money. If you get in touch, we’ll arrange for an experienced broker we work with to contact you directly.

Can you switch from interest-only to repayment?

Yes is the simple answer to this, and actually this can be a positive move as it will reduce the overall cost of your loan if you can start to repay the capital as well as the interest. It’s quite common for people to switch from interest-only to repayment as they progress in their careers and earn more money, or personal circumstances make it more affordable.

Your monthly mortgage payments will increase significantly when you switch, so lenders will want to be sure you can afford the extra cost. You have the option to stay with the same lender and the same or a new deal, or switch lenders completely and remortgage. A broker will be able to advise you on the best course of action.

Can you switch from repayment to interest-only?

Yes, switching to interest-only is an option too and can be useful if you’re struggling to afford the monthly payments on your repayment mortgage. The important thing here will be your repayment vehicle – you can’t make the switch simply to save some money every month without a proper plan in place.

Can you get an interest-only mortgage with bad credit?

Yes, it’s possible. Many people worry that having a bad credit history will exclude them from being able to get a mortgage of any kind, but bad credit doesn’t have to be a deal breaker. Many lenders understand that credit issues can arise for all kinds of reasons and so will take a broader and more considered view of your financial situation.

The key is to have a realistic idea of where you stand, so get an up to date copy of your credit file, check it thoroughly to make sure it’s accurate, and think about any steps that you could take pre-application to improve it. If you go to a broker who specialises in bad credit mortgages they will be able to guide you directly to the lenders who are more likely to consider your application.

Get matched with a specialist mortgage broker

Whether you’ve already chosen between an interest-only and a capital repayment mortgage or still need some help deciding what’s right for you, a mortgage broker can be a huge help. Their in-depth market knowledge means they can go straight to the best lenders for you and negotiate the cheapest rates, potentially saving you thousands over the term of your loan.

Give us a call on 0808 189 2301 or make an enquiry and we’ll set up a free, no-obligation chat with an advisor. All of the brokers we work with have been vetted by us, and we’ll make sure to match you with the person that we know has the most relevant experience and contacts for your circumstances.

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If you get to the end of the interest-only mortgage term and can’t pay off the capital, then in extreme cases, you are at risk of having your property repossessed, and even having to pay the debt from other assets if the value of the property doesn’t cover the debt. There may be other options, such as extending the term of the loan or remortgaging, but these aren’t guaranteed. Talk to your lender as soon as you can if you’re worried you might not be able to pay.

If you are in a position to overpay on your mortgage, overpaying a capital repayment mortgage makes much more financial sense. When you overpay on a repayment mortgage, you’re bringing down the overall debt and increasing your equity share, whereas with an interest-only mortgage you are only reducing future interest payments, not the capital amount of the loan unless you agree with your lender to pay off lump sums of capital and re-structure your mortgage.

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About the author

Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes. The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.

Pete’s presence in the industry as the ‘go-to’ for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for Online Mortgage Advisor of course!

Read more about Pete

Pete Mugleston

Mortgage Advisor, MD

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