Mortgage repayment options

When you take out a mortgage there are different ways you can pay it – repayment, interest-only, or a combination of the two. Be MoneyFit and find out how they work and which one is right for you.

What are capital and interest?

A mortgage has two parts:

  • Capital: the money you borrow
  • Interest: the charge made by the lender on the amount you owe 

If you choose a repayment mortgage, you pay back the capital and the interest together. With an interest-only mortgage, you initially only pay back the interest on a monthly basis and repay the capital at the end of the mortgage term.

Repayment mortgages

This is the most popular and most widely available mortgage repayment option.  With a repayment mortgage you’ll make monthly repayments for an agreed period of time (known as the term) until you’ve paid back both the capital and the interest.

This means that your mortgage balance will get smaller every month and, as long as you keep up the repayments, your mortgage will be repaid at the end of the term (usually 25 years).

Be aware that when you start your mortgage, the repayments will mainly be interest, so if you want to repay the mortgage or move house in the early years, you'll find that the amount you owe won't have gone down by much.

You must also then decide the type of repayment mortgage you want, whether it’s to have the interest rate fixed over time, or variable, which means the interest rate can go up or down.

Money fitness tip

Whichever option you choose, you must make sure you can keep up the repayments, otherwise the lender can take back your home and sell it to get it's money back.

Interest-only mortgages

With interest-only mortgages you only pay the interest due on the amount you borrowed each month. So while your monthly payment will be less than with an equivalent sized repayment mortgage, you will still owe the amount you originally borrowed at the end of the mortgage term. Just like repayment mortgages, you can fix the interest over time or it can be paid back at a varilable rate. 

Paying back the capital

Lenders will require that you have a repayment strategy in place so that you'll have money to pay off the capital at the end of the mortgage. Lenders have different criteria, but a suitable repayment plan is likely to mean paying regularly into savings and investments and could include pensions and other properties.

If you use an investment plan, it’s your responsibility to be sure it is on track to pay off the capital at the end of the mortgage, but your lender will also review the amount at least once during the mortgage term. If it’s not on track you will find it difficult to remortgage or switch to another lender.

Some lenders may ask for a larger deposit if you have an interest-only mortgage.

If you have a substantial deposit and are considering an interest-only mortgage you may want to get financial advice to work out the best repayment method - see Choosing a financial adviser.

Combined repayment/interest-only mortgages

Some lenders offer mortgages on a part-repayment part-interest-only basis.  This option means that at the end of the term some of the mortgage capital will still be owed and will need to be repaid. Each lender will have different rules about this.

What to do next

See our Getting a mortgage section.

Use the Mortgage calculator on the Money Advice Service's website to compare interest rates.

Mortgages: Repayment or interest-only

How they compare

Choosing an interest-only mortgage will mean lower monthly payments, but at the end of the term you will not own the property - only the stake paid for by your initial deposit.

A repayment mortgage will cost more but you will end up owning the property outright.

Mortgage infographic

Last reviewed: 05/06/2017

This content has been provided by the Money Advice Service