Repayment vs Interest-Only Mortgages
A repayment mortgage gradually clears both the capital and interest through the monthly payments. An interest-only mortgage usually requires lower monthly payments, but the original capital remains outstanding and must be repaid separately at the end of the term.
Choosing between repayment and interest-only is not the same as choosing between a fixed and variable interest rate. The repayment method determines how the capital is cleared, while the interest-rate type determines how the rate and monthly cost are set.
Interest-only borrowing is available in more restricted circumstances than a standard repayment mortgage. A lender will normally require a credible strategy showing how the capital will be repaid, as well as evidence that the monthly interest payments are affordable.
What is the difference between repayment and interest-only?
Every mortgage consists of capital and interest. The capital is the money borrowed from the lender. Interest is the charge for borrowing that money.
With a capital repayment mortgage, the required monthly payment includes interest and an amount that reduces the capital. Provided all payments are made and the mortgage conditions do not change unexpectedly, the loan should be cleared by the contractual end date.
With an interest-only mortgage, the required monthly payment generally covers only the interest. The capital does not reduce through those contractual payments. The borrower must therefore use a separate repayment strategy to clear the remaining balance at the end of the term.
Capital and interest are paid monthly
Each monthly payment includes the interest due and part of the original loan. The balance gradually decreases, although the early payments normally contain a higher proportion of interest than later payments.
The capital is repaid separately
The contractual monthly payment normally covers the interest but does not reduce the original borrowing. A suitable repayment strategy must be maintained to provide the capital at the end.
You must continue paying the mortgage interest every month and repay the complete capital balance at the end of the term. Missing interest payments can lead to arrears, damage to your credit record and ultimately repossession.
How does a repayment mortgage work?
The lender calculates a monthly payment intended to repay the mortgage over the agreed term. The calculation considers the amount borrowed, interest rate and remaining number of payments.
During the earlier years, interest is being charged on a relatively large balance. A greater proportion of the monthly payment therefore goes towards interest. As the balance reduces, less interest is charged and more of the payment contributes towards clearing the capital.
If the mortgage rate changes, the required payment may also change. A fixed-rate mortgage usually keeps the payment stable during the fixed period, while a tracker, discounted or standard variable rate can move according to its terms.
Advantages of a repayment mortgage
- The mortgage balance reduces through normal payments
- No separate capital repayment strategy is normally needed
- The mortgage should be cleared at the end if payments are maintained
- Progress can be seen through the reducing balance
- It reduces reliance on future investment or property values
- It is widely available for residential mortgage applications
Points to consider
Monthly payments are usually higher than the interest-only payments on an equivalent loan because capital is also being repaid. Affordability can therefore be more demanding in the short term.
A longer term can reduce the monthly payment but normally increases the total interest paid. The term should balance present affordability with the cost and age at which the mortgage is expected to finish.
How does an interest-only mortgage work?
The lender calculates the interest due on the outstanding mortgage balance. Provided the borrower pays only the required interest, the capital normally remains unchanged throughout the term.
For example, someone borrowing £200,000 on a fully interest-only basis would generally still owe £200,000 at the end unless they make capital overpayments or use part of their repayment strategy earlier. They must therefore have a credible method of producing the £200,000 when it becomes due.
The lender may assess the repayment strategy when the mortgage begins and review it during the term. The borrower remains responsible for monitoring whether the strategy is on track. A lender’s initial acceptance does not guarantee that investments, property values or other assets will eventually produce enough money.
Potential advantages of interest-only
- Lower required monthly payments than equivalent repayment borrowing
- Potential flexibility for borrowers with suitable assets
- Commonly used for certain buy-to-let mortgage arrangements
- Capital overpayments may be possible where the product permits them
Important risks
- The capital does not reduce through normal interest payments
- The repayment strategy may underperform or become unavailable
- The property may need to be sold to repay the lender
- Property values can fall as well as rise
- Investment returns are not guaranteed
- Refinancing at the end of the term is not guaranteed
Reaching the end of the term without enough money to repay the capital is a serious problem. Contact the lender and obtain advice as early as possible if the repayment strategy appears insufficient. Waiting until the maturity date can significantly reduce the available options.
Repayment and interest-only mortgages compared
| Feature | Repayment mortgage | Interest-only mortgage |
|---|---|---|
| Monthly payment | Includes interest and part of the capital. | Normally covers interest only. |
| Mortgage balance | Gradually reduces if payments are maintained. | Normally remains unchanged unless capital payments are made. |
| End of the term | The mortgage should be cleared if all required payments have been made. | The complete capital balance must be repaid separately. |
| Repayment strategy | Usually unnecessary because capital is included in the monthly payment. | A credible and acceptable strategy is normally required. |
| Monthly affordability | Higher payments than an equivalent interest-only loan. | Lower required payments because capital is not included. |
| Overall interest | Generally lower because the balance reduces throughout the term. | Generally higher where the balance remains unchanged for the complete term. |
| Residential availability | Widely available, subject to affordability and lender criteria. | More restricted and subject to repayment-strategy requirements. |
| Buy-to-let use | Available but may produce higher monthly payments. | Commonly used, although the capital must still be repaid. |
Consider a £200,000 mortgage over 25 years at an interest rate of 5%. The following figures are approximate and assume the rate remains unchanged, payments are made monthly and no fees or additional costs apply.
The payment includes capital and interest, with the mortgage intended to be cleared over 25 years.
The payment covers interest, but the £200,000 capital would still need to be repaid at the end.
The lower interest-only payment does not include the separate amount that may need to be saved or invested towards repaying the £200,000 capital. Actual mortgage rates, criteria and payments will differ.
Repayment method and interest-rate type are different decisions
Fixed, tracker and variable describe how the mortgage interest rate behaves. Repayment and interest-only describe how the capital is repaid.
A mortgage can therefore be fixed-rate and repayment, fixed-rate and interest-only, tracker-rate and repayment, or tracker-rate and interest-only. The available combinations depend on lender criteria and the selected product.
How the rate is determined
Fixed, tracker, discounted and standard variable rates affect whether the interest rate and monthly payment can change during a particular period.
How the capital is cleared
Repayment, interest-only and part-and-part arrangements determine whether capital is repaid monthly or remains due at the end of the term.
Our guide to fixed and tracker mortgages explains how those interest-rate arrangements differ.
Who can qualify for an interest-only mortgage?
Residential interest-only mortgages are generally subject to more restrictive criteria than repayment mortgages. The lender must be satisfied that the interest payments are affordable and that the proposed repayment strategy has the potential to clear the capital.
Criteria vary considerably, but the lender may consider:
- Minimum income requirements
- Deposit and maximum loan-to-value
- The type and value of the repayment strategy
- Whether the repayment strategy is already established
- The proposed mortgage term
- The applicant’s age at the end of the term
- Credit history and existing commitments
- Whether the property is a home or investment property
- Minimum property value requirements
- The interest-only amount compared with the property value
A larger deposit is commonly required because the lender may restrict interest-only lending to a lower loan-to-value. Some lenders allow only part of the mortgage to operate on an interest-only basis.
Applicants should not assume that the lower contractual payment allows them to borrow more. A residential lender may assess affordability on a repayment basis or apply stressed interest rates, even where the proposed mortgage is interest-only.
A strong income does not replace the need for an acceptable repayment strategy. Equally, holding investments or property does not remove the need to demonstrate that the monthly interest payments are affordable.
What can be used as an interest-only repayment strategy?
A repayment strategy, sometimes called a repayment vehicle, is the asset or arrangement intended to provide the capital required at the end of the term. The lender decides which strategies it accepts and how it values them.
Potential strategies can include:
- Cash savings accumulated over the mortgage term
- Stocks and shares investments
- Investment ISAs
- Existing endowment policies
- Permitted pension lump-sum arrangements
- Sale of another property
- Sale of the mortgaged property
- A combination of acceptable assets
Not every lender accepts every strategy. Some will not accept the planned sale of the borrower’s main home, while others may accept it only where there is substantial equity and a credible downsizing plan. A lender may apply a discount to investment or property values rather than assuming that their full current value will be available.
Expected inheritance is uncertain and may not be accepted as a repayment strategy. The amount, timing and legal entitlement might change, and the person providing the inheritance may need the assets themselves.
Investment risk
Investments can fall as well as rise. A strategy that appears sufficient when the mortgage begins might later develop a shortfall. Regular reviews are therefore important, especially as the mortgage approaches maturity.
Mortgage advice does not automatically include investment or pension advice. Where the repayment strategy involves investments, pensions or taxation, advice from an appropriately authorised specialist may be required.
The lender may check that a repayment strategy appears credible, but it does not guarantee its future performance. You remain responsible for monitoring the strategy and addressing any projected shortfall.
What is a part-and-part mortgage?
A part-and-part mortgage divides the borrowing between capital repayment and interest-only. The repayment portion gradually reduces through the monthly payments, while the interest-only portion remains due at the end of the term.
For example, a £200,000 mortgage might be arranged with £120,000 on repayment and £80,000 on interest-only. If the required payments are maintained, the £120,000 portion should be cleared by the end of the term, but a repayment strategy would still be needed for the £80,000 interest-only balance.
Part-and-part can reduce the capital repayment required at the end while keeping the contractual monthly payment below that of a fully repayment mortgage. However, the arrangement still carries interest-only risk and remains subject to lender criteria.
A lender might limit the interest-only portion according to loan-to-value, repayment strategy or applicant profile. The borrower should monitor both the mortgage balance and the assets intended to repay the interest-only section.
Residential and buy-to-let interest-only mortgages
Interest-only arrangements are commonly associated with buy-to-let mortgages. Landlords may use interest-only borrowing to keep contractual mortgage payments lower and manage rental cash flow. However, the capital remains outstanding and must eventually be repaid.
Buy-to-let affordability is commonly assessed using expected rental income and a lender’s rental stress calculation, although personal income can also be relevant. Deposits and interest rates can differ from residential borrowing.
A landlord might intend to sell the rental property to repay the mortgage. This depends on the future sale price being sufficient to clear the loan, selling costs and any applicable tax. Property values are not guaranteed to rise, and a sale might be required during an unfavourable market.
Residential interest-only mortgages are usually assessed differently because the property is the applicant’s home. Relying on the eventual sale of the home may require a realistic downsizing plan and enough projected equity to purchase suitable alternative accommodation.
Our buy-to-let mortgage guide explains deposits, rental affordability and other considerations for property investors.
Can you switch between repayment and interest-only?
It may be possible to change the repayment method, but lender approval is normally required. The lender will consider the mortgage, affordability, repayment strategy and product conditions before agreeing to a permanent change.
Changing from interest-only to repayment
Switching to repayment can help reduce the capital and lower the amount that must be found at the end. However, the contractual monthly payment will increase because it must cover capital as well as interest.
The shorter the remaining term, the larger the increase may be. If a substantial interest-only balance needs to be repaid over relatively few years, the new payment could be considerably higher.
The lender may also allow capital overpayments or a part-and-part arrangement, subject to the mortgage conditions and any early repayment charge. Our guide to mortgage overpayments explains how additional payments can affect the balance and term.
Changing from repayment to interest-only
A permanent switch to interest-only is not guaranteed merely because the resulting monthly payment would be lower. The lender will usually require an acceptable repayment strategy and may reassess affordability and loan-to-value.
Temporary interest-only support may be available in particular circumstances, but it does not permanently change the need to repay the capital. If you are experiencing payment difficulties, contact the lender before missing a payment.
What happens when an interest-only mortgage reaches the end of its term?
The complete capital balance becomes due at maturity. The borrower uses the agreed repayment strategy to repay the lender. This might involve cashing in investments, using savings, selling another asset or selling the mortgaged property.
If the strategy does not provide enough money, the borrower has a repayment shortfall. The lender should be contacted as early as possible. Potential options might include using other funds, making capital payments, switching repayment method, extending the term, remortgaging or selling the property.
None of these alternatives is guaranteed. A term extension or new mortgage will depend on affordability, age, income, credit history, property value and lender criteria at that time. Selling the property also takes time and involves legal and transaction costs.
Borrowers should not rely on the lender automatically extending the mortgage at maturity. The contractual balance is due, and the lender can ultimately take possession proceedings if the debt is not repaid and no acceptable arrangement is reached.
If you already have an interest-only mortgage, review the expected value of the repayment strategy regularly. Addressing a potential shortfall several years before maturity usually provides more options than waiting until the capital becomes immediately due.
Independent guidance for existing borrowers is available from MoneyHelper.
Which repayment method may be suitable?
A repayment mortgage generally provides greater certainty that the capital will be cleared through the contractual monthly payments. It may suit borrowers who can afford the higher payments and do not want to rely on investments, property sales or another future lump sum.
Interest-only may be appropriate in more limited circumstances where the applicant meets the lender’s criteria, understands the risks and has a credible repayment strategy. The lower contractual payment should not be considered in isolation because separate provision must be made for the capital.
Part-and-part borrowing can provide a middle position, but the interest-only portion still requires a repayment strategy. The appropriate structure depends on affordability, assets, future plans, property use, mortgage term and tolerance for risk.
| Question to consider | Why it matters |
|---|---|
| Can I afford the repayment mortgage payment? | The payment should remain manageable alongside household expenditure and other financial commitments. |
| How will the capital be repaid? | An interest-only application requires a credible strategy rather than an uncertain future intention. |
| What happens if asset values fall? | Investments or property might provide less than expected, creating a shortfall. |
| Will I need to remain in the property? | A strategy based on selling the home must allow for suitable alternative accommodation. |
| When does the mortgage term end? | Age, retirement income and the time available to build the repayment strategy can affect suitability. |
| Could my income or expenditure change? | Both the mortgage payment and separate repayment strategy need to remain affordable. |
How Chesterton Grant can help
Chesterton Grant can assess your borrowing requirements, affordability, property plans and proposed repayment method before researching suitable mortgage options. The recommendation considers lender eligibility, monthly payments, total cost, product fees, restrictions and the risks associated with the repayment structure.
Where interest-only or part-and-part borrowing is being considered, the adviser can explain the mortgage lender’s repayment-strategy requirements. Separate regulated investment or pension advice may be required where those assets form part of the strategy.
We research a comprehensive range of mortgages from across the market, excluding products available only by applying directly to a lender. We do not charge clients a broker advice or mortgage-arrangement fee. If an arranged mortgage completes, we are normally paid a procuration fee by the lender, with the expected payment disclosed in the relevant documentation.
Interest-only can make the contractual mortgage payment appear lower, but the capital must still be provided. A suitable comparison considers the mortgage payment, repayment strategy, risk and likely position at the end of the term.
Frequently asked questions about repayment and interest-only mortgages
Is an interest-only mortgage cheaper than a repayment mortgage?
An interest-only mortgage normally has a lower contractual monthly payment than an equivalent repayment mortgage because the payment covers interest but does not include repayment of the capital. This does not necessarily make it cheaper overall.
With a repayment mortgage, the balance gradually reduces. Interest is therefore calculated on a decreasing amount. With a fully interest-only mortgage, the original capital can remain outstanding for the complete term, meaning interest continues to be charged on the full balance.
The borrower must also fund a separate repayment strategy. Money paid into savings, investments or another asset should be considered alongside the contractual interest payment. Looking only at the payment sent to the mortgage lender can understate the real monthly provision needed.
Investments can involve management charges and can fall in value. A property-sale strategy involves sale costs and uncertainty about the future property value. If the strategy produces a shortfall, the borrower must find the remaining money elsewhere.
Product rates and fees can also differ. An interest-only product is not guaranteed to carry the same rate as a repayment mortgage, and stricter deposit or loan-to-value requirements may apply.
The correct comparison therefore includes the mortgage rate, product fees, interest paid over the term, cost of funding the repayment strategy and the risk that the strategy does not provide the full capital. Lower monthly mortgage payments should not be interpreted as proof of lower total cost.
Can a first-time buyer get an interest-only mortgage?
A first-time buyer may be able to obtain an interest-only mortgage, but residential interest-only lending is restricted and lender choice is likely to be narrower than for a repayment mortgage. Being a first-time buyer is not necessarily an automatic prohibition, but the applicant must satisfy the lender’s income, affordability, deposit and repayment-strategy requirements.
A lender may require a higher income or larger deposit than it would for a repayment mortgage. It will also need an acceptable strategy for clearing the capital. An intention to save in future without a structured plan might not be sufficient.
Some strategies are particularly difficult for first-time buyers. They may not own another property that can be sold and may not already hold investments of sufficient value. If sale of the new home is proposed, the lender may require substantial equity and evidence that the applicant could purchase suitable alternative accommodation.
The lower interest-only payment should not be used as a way of stretching the purchase budget without considering the capital. The lender may assess affordability using a repayment calculation or stressed payment, even where the requested mortgage is interest-only.
A repayment mortgage is generally more widely available and provides a structured route to clearing the loan. Part-and-part borrowing might be considered where lender criteria permit it, but the interest-only portion still requires a repayment strategy. First-time buyers should compare the long-term risk and total commitment rather than concentrating only on the initial monthly payment.
What counts as an acceptable interest-only repayment strategy?
Each lender decides which repayment strategies it will accept and how much value it attributes to them. A strategy accepted by one lender might be restricted or rejected by another.
Potentially acceptable arrangements can include cash savings, investment ISAs, stocks and shares, existing endowment policies, permitted pension lump sums, sale of another property or sale of the mortgaged property. A combination of assets may also be considered.
The lender may require evidence that the assets already exist. It might apply a discount to their current or projected value to allow for market movements and selling costs. Investments are not guaranteed to grow, while property values can fall or remain unchanged.
Where the strategy involves selling the borrower’s home, the lender may assess whether sufficient equity is expected to remain after repaying the mortgage. It may also consider whether the borrower has a credible plan for obtaining suitable alternative accommodation.
An expected inheritance is uncertain and might not be accepted. The timing and amount can change, and the person whose estate is expected to provide it may need to use the money themselves.
The borrower remains responsible for monitoring the strategy throughout the term. Initial lender acceptance is not a guarantee that the asset will eventually clear the mortgage. Investment and pension strategies can also require advice from an appropriately authorised specialist because mortgage advice alone does not cover every investment, pension or tax implication.
What happens if I cannot repay my interest-only mortgage at the end?
The complete capital balance becomes contractually due when an interest-only mortgage reaches maturity. If the repayment strategy does not produce enough money, the borrower has a shortfall and should contact the lender immediately. Ideally, the lender should be contacted as soon as a potential shortfall becomes apparent rather than waiting until the end date.
Possible responses might include using other savings or assets, making capital overpayments, switching part or all of the mortgage to repayment, extending the term, remortgaging or selling the property. Whether any option is available depends on affordability, income, age, credit history, property value and lender criteria.
A term extension is not automatic. It may take the mortgage further into retirement, when income could be lower. Remortgaging is also not guaranteed because future rates and lending requirements cannot be known in advance.
Selling the property can provide the capital if the net proceeds are sufficient, but legal costs, estate-agent fees and the time required to sell must be considered. If the property value is lower than expected, there may still be a shortfall.
The lender should consider the borrower’s circumstances and discuss possible solutions, but it is not required to leave the mortgage outstanding indefinitely. If the debt cannot be repaid and no acceptable arrangement is reached, the lender can ultimately take legal action to recover the property. Early engagement usually provides more time to assess realistic alternatives.
Can I switch an interest-only mortgage to repayment?
Many borrowers can ask their lender to switch some or all of an interest-only mortgage to capital repayment. This can reduce reliance on the repayment strategy because the capital begins to decrease through the contractual monthly payments.
The lender will explain its process and whether an affordability assessment, product change or administration fee applies. The required monthly payment will increase because it must cover both capital and interest.
The remaining term has a significant effect. Repaying a large balance over 20 years produces a lower monthly payment than clearing the same balance over five years. Extending the term might reduce the payment, but it normally increases the total interest and may carry the mortgage into retirement.
If a complete switch is unaffordable, the lender might consider a part-and-part arrangement, term change or capital overpayments. These options are not guaranteed and must comply with the mortgage conditions. An early repayment charge can sometimes apply to large overpayments.
Switching does not correct a shortfall instantly. The borrower should calculate how much capital the new payments are expected to clear and continue monitoring any remaining interest-only portion.
If the existing lender cannot offer a suitable change, remortgaging may be considered. A new lender will assess affordability, credit history, property value and income. Obtain advice before submitting applications because unsuccessful speculative applications can create unnecessary credit searches and delays.
Can I overpay an interest-only mortgage to reduce the capital?
Many interest-only mortgages allow capital overpayments, but the amount, frequency and potential charges depend on the product terms. An additional capital payment reduces the balance once the lender applies it correctly.
Reducing the balance can lower future interest because interest will be calculated on a smaller amount. It also reduces the capital that the repayment strategy must eventually provide. However, you should confirm how the lender will treat the payment before sending it.
Some products have a penalty-free annual allowance. Exceeding that allowance during an early repayment charge period could result in a fee. The commonly quoted allowance of 10% does not apply universally, and different lenders calculate their limits in different ways.
Ask whether the contractual monthly interest payment will reduce after the overpayment or whether it will be recalculated at a later date. Continue making the required payment until the lender confirms a new amount.
Overpayments are not normally a replacement for maintaining the separate repayment strategy unless the capital is being reduced sufficiently to change the plan. Money paid permanently into a conventional mortgage may also be difficult to access again.
Before making a substantial payment, retain appropriate emergency savings and compare the overpayment with other debts and financial priorities. Where the repayment strategy involves investments or pensions, separate regulated advice may be appropriate before changing or cashing in those assets.
Why are interest-only mortgages common for buy-to-let properties?
Interest-only borrowing is common in buy-to-let because the contractual monthly payment is lower than the payment on an equivalent repayment mortgage. This can improve the property’s immediate rental cash flow, although it does not remove the landlord’s responsibility for repaying the capital.
Buy-to-let lenders commonly assess the mortgage using expected rental income and a rental stress calculation. They may also consider the applicant’s personal income, landlord experience, deposit and wider property portfolio.
A landlord may plan to sell the property at the end of the mortgage term and use the proceeds to clear the loan. This strategy depends on the sale producing enough money after repaying the mortgage, tax and transaction costs. Property values can fall, and the landlord might need to sell during an unfavourable market.
Alternatively, the landlord might build savings, make overpayments or refinance the property. Refinancing is not guaranteed because future rental calculations, interest rates, property values and lender criteria can change.
A repayment buy-to-let mortgage reduces the balance over time but produces higher required monthly payments. The appropriate structure depends on cash flow, tax position, investment objectives, repayment plans and risk.
Mortgage advice does not replace tax advice. The tax treatment of mortgage interest, rental profits and property disposal can depend on ownership structure and individual circumstances. Some buy-to-let mortgages are not regulated by the Financial Conduct Authority.
How does a part-and-part mortgage work?
A part-and-part mortgage divides the borrowing into a capital repayment portion and an interest-only portion. The monthly payment reduces the repayment portion over the agreed term while covering interest on the interest-only portion.
Suppose a £200,000 mortgage consists of £120,000 on repayment and £80,000 on interest-only. If the contractual payments are maintained, the £120,000 portion should be cleared by the end of the term. The £80,000 interest-only portion would still need to be repaid using an acceptable strategy.
This arrangement can produce a lower monthly payment than placing the complete £200,000 on repayment, while reducing the eventual capital requirement compared with a fully interest-only mortgage.
Part-and-part does not eliminate interest-only risk. The borrower still needs a strategy with the potential to provide the remaining balance. Investments, property values or other assets could produce less than expected.
Lenders can restrict how much borrowing is permitted on interest-only. The permitted split might depend on income, deposit, loan-to-value, property value and the repayment strategy. Some lenders also require minimum loan amounts for each portion.
The mortgage statement should show how the balances change. Borrowers should monitor the interest-only portion and review the repayment strategy regularly. Capital overpayments may be directed towards one portion where the lender permits this, but early repayment limits and the effect on monthly payments should be confirmed first.
Compare repayment and interest-only mortgage options
Chesterton Grant can assess your affordability, repayment plans and wider circumstances before researching suitable mortgage options, without charging you a broker advice or mortgage-arrangement fee.