Updated: March 02, 2022

How Interest-Only Mortgages Compare to Capital Repayment Mortgages

Unsure whether an interest only or repayment mortgage is right for you? Find what they both are, the pros, cons and your next steps in our in-depth guide.

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Pete Mugleston

Author: Pete Mugleston - Mortgage Expert

Updated: March 02, 2022

If you’re thinking of buying a property and, like many, aren’t in a place to pay the full whack up front, you’ll need a mortgage. That’s an amount you borrow from a lender and pay back over time with interest. You then have two choices on how to repay that money: interest-only versus capital repayment.

By reading this guide, you’ll learn how these two mortgage types compare to one another, what their pros and cons are, and gain a better understanding of which one is right for you.

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

With an interest-only mortgage, you’re only obliged to pay off the interest each month and capital repayments are optional. The mortgage debt itself isn’t due until the end of the term and is settled through a repayment vehicle, which the lender will want to see evidenced in advance.

This is a stark contrast to a capital repayment mortgage, which involves making interest and capital repayments each month and paying the debt off across the mortgage term, which is typically 25 years, but can be longer or shorter.

The table below offers a quick summary of the key differences between interest-only and capital repayment mortgages…

Interest-only Capital repayment
Separates capital and interest. Combines capital and interest.
Capital borrowed remains the same until the end of the term. Capital borrowed gradually reduces.
At end of mortgage term, capital will need to be paid in full. At end of mortgage term, capital will have been repaid.
Need to be able to show plan now for repayment later. At end of mortgage term, property is solely owned by purchaser.

For example purposes, if you take out a mortgage of £200,000 over 25 years and opt to pay interest-only at a rate of 3%, you’d only be paying £500 a month. If you add in the capital, that would rise to £948. At the end of the 25 years with interest only, you’d have to pay the £200,000 lump sum but with a capital repayment mortgage it would already be paid off.

Try our calculator below to see how your mortgage repayments will differ depending on which type of agreement you choose.

calculator icon

Mortgage Repayment Calculator

Our mortgage repayment calculator can tell you how much your mortgage will cost you each month and overall. Enter the amount you’re borrowing, the term length and interest rate, and our calculator will do the rest.


Enter the amount you're borrowing
£
2.5% is an average figure but the rate you get may vary
%
25 years is average, but most lenders offer longer and shorter terms
years

Monthly Repayments:

Total amount paid at end of term:

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

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Very few lenders offer interest-only mortgages. If they do, they tend to want a larger deposit and evidence of the repayment vehicle before they’ll consider mortgage approval.

Repayment vehicles

What each lender accepts as a repayment vehicle is at their discretion, but an experienced broker will know which lenders accept what. A few valid options for you to consider include:

  1. Your property. The money from a future sale can be used to pay off the capital.
  2. A lump sum from a pension plan. You’re able to take out up to 25% of your pension tax free when you retire – this could be arranged to coincide with the end of your mortgage term.
  3. Investment portfolio. This can include ISAs, Unit Trusts, Open Ended Investment Companies (OEICs), stocks and shares and/or investment bonds.
  4. Family inheritance or trust fund.

The brokers we work with can offer further guidance on which repayment methods to pursue and how to do so.

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Pros and cons

Still swaying on where you might land in terms of repayment? There’s no right or wrong option. While capital repayment is the most popular method, interest-only has its advantages too, especially if you’re considering downsizing or buying-to-let.

Interest-only

The advantages of interest only are as follows…

  • Lower monthly repayments. Leaving the capital by the wayside means it’s just the interest you’re paying.
  • Optional capital payments can be made: If you want to chip away at your mortgage debt during the term, many interest-only mortgage lenders allow this.
  • Good option for retirees and buy-to-letters. If you plan to downsize when you retire, the equity from your existing property can be used to pay off an interest-only loan. And it’s assumed if you’re buying a property to rent it out that eventually it’ll be sold following market growth.

Possible drawbacks to consider include…

  • Repayment vehicles can be uncertain: If you’re planning to settle the mortgage debt with an investment, for example, there’s no guarantee it will generate the amount you need. Selling the property might even leave you with a shortfall if its value has dropped.
  • Bigger deposit needed. It’s common for lenders to look for upwards of 25% of the total mortgage for the deposit in an interest-only situation.

Capital repayment

The advantages include…

  • Less risk. This type of mortgage doesn’t leave you holding out hope for a cash influx further down the line.
  • Lower deposit required. A typical deposit sits upwards of 10% to 15% of the mortgage.

Potential disadvantages…

  • Higher monthly repayments. Paying both interest and capital means the amount coming out of your account each month will be higher than the interest-only option.

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How a broker can help you choose the right mortgage type

Brokers are able to talk you through each option in more detail, familiar with lenders and their requirements, experienced in both types of repayment model, the mortgage brokers we work with are a one-stop shop when it comes to the mortgage process. They…

  1. Understand the intricacies of both interest-only and capital repayment;
  2. Have existing relationships and knowledge of lenders offering these two options;
  3. Can offer tailored advice to your specific circumstances.

If you already know which way you’d like to go, they can also get the ball rolling in terms of your mortgage application and make sure you get the best deal.

Interest rates for interest-only and capital repayment

If you go for a fixed term interest-only mortgage, you can expect to pay anywhere between 1% and 3% in interest during the introductory rates period. The lender’s standard variable rate is likely to be around 5%, unless you remortgage to fix yourself back in. A discount mortgage sees that rate fluctuate between 1% and 3% with a follow on rate around 5%.

On the capital repayment side, a fixed rate mortgage could see you initially paying anywhere between 1.5% and 3% depending on the fixed term with a follow-on rate of around 4%. Switching to a tracker or discount mortgage sees both of those numbers drop slightly.

Can you switch from one to the other?

Yes. Whatever decision you make doesn’t mean you’re bound to it forever. If your situation changes, you can switch from one type to the other – with your lender’s approval – be it permanently or temporarily. Just check you’re not in the Early Repayment Charge period on your existing mortgage. If you are, there might be a fee to pay.

Repayment to interest-only

The first thing to ask yourself is if you’re eligible. Do you have a repayment vehicle in place for the end of term payment? If you do, then it’s best to connect with a broker specializing in changing mortgages. They’ll work with you to consider your credit history, income, and the amount of equity in your property – all things a lender will be looking at during the application for a switch.

Interest-only to repayment

First, consider if there are any steps you could take beforehand. Would making additional payments towards your repayment vehicle or a few mortgage overpayments be alternative solutions?

If not, and a switch is the right step for you, then take a look at your finances to make sure you’ll be able to afford the repayments, which are likely to be higher in a repayment mortgage. You can then choose to:

  1. Stay with the same lender, same agreement and interest rate just switch to a repayment mortgage
  2. Get an entirely new repayment mortgage with the same lender
  3. Remortgage and try to find a better deal with a new lender
  4. Take a hybrid approach via a part-and-part mortgage (see below)

Part-and-part mortgages

A combination of both repayment and interest-only models, this type of mortgage allows you to pay off some of the mortgage but also means there’ll be an amount, the interest, left to pay at the end of the term. It’s a way of ensuring there’s less to pay at the end than there would be with an interest-only model but also means your monthly repayments don’t have to be as high as they would be with repayment. It allows for more flexibility and the tailoring to amounts that suit you. But, just like with interest-only, a lender will need to see you have a way of paying back that lump sum, albeit a smaller one, at the end. A broker can negotiate this type of mortgage with your existing lender or find you a new one.

Try our calculator below to see what your monthly payments could look like if you choose this type of agreement.

calculator icon

Part and Part Mortgage Calculator

This calculator will work out what your mortgage payments will be on an agreement that’s part interest only and part capital repayment. Simply enter the full loan amount and the portion of the debt that will be interest only, along with the interest rate and term length, and our calculator will do the rest.


Enter the amount you're borrowing
£
Enter the total amount required on interest only
£
Must be less than the loan amount
2.5% is roughly average you can enter a custom percentage
%
25 years is average, but most lenders offer longer and shorter terms
years

Monthly Repayments:

Monthly Interest Payments:

Monthly Total Payments:

Now that you have a rough idea of what your monthly repayments could look like, speak to a mortgage broker to find out how much they could help you save each month and overall.

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Get matched with the right mortgage broker today

There are lenders who are best placed when it comes to capital repayment, others for interest-only and some with a specialism in part-and-part mortgages. Working with a broker can save you the hours of sifting through endless websites looking for the right one. After a quick consultation, they’ll know which is right for you.

If mortgage advice and repayment guidance is something you need, a free consultation with one of the brokers we work with can be a big help. Call 0808 189 0463 or make an enquiry. We’ll then reach out to a broker best suited to your situation and set up a free, no-obligation chat between you and them today.

FAQs

What’s a retirement interest-only mortgage?

Similar to a regular interest-only mortgage and an alternative to equity release mortgages, a retirement interest-only mortgage is a type of agreement that involves the borrower only paying off the interest each month, with no set end date to pay off the full amount. The idea is that the loan is only paid back if you sell, go into care or pass away.

Why do interest-only mortgages have a bad reputation?

Before the financial crash of 2008, interest-only mortgages were common but stipulations on how people were going to pay the money back weren’t as stringent. When the crash came, many couldn’t pay back their loan and were forced to sell up. This garnered a bit of bad press.

Will anyone be keeping an eye on my repayment plan for interest only?

It’s likely lenders will monitor your repayment plan checking in at regular intervals to see if it’s coming to fruition and is still viable. If it’s not on track to help you pay off your mortgage, your lender will likely be willing to discuss fallback options with you, but seeking independent advice from a mortgage broker is recommended

Ask A Quick Question

We can help! We know everyone's circumstances are different, that's why we work with mortgage brokers who are experts in Interest Only Mortgages Ask us a question and we'll get the best expert to help.

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Pete Mugleston

Pete Mugleston

Mortgage Expert

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 OMA of course!

FCA Disclaimer

*Based on our research, the content contained in this article is accurate as of the most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms that are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs.

Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

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