Mortgage repayment options explained

There are three different ways you can repay your mortgage: repayment, interest-only, or a combination of the two. Read our guide to learn more about your mortgage repayment options.

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 mortgage

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.

Read Mortgage types: choose a fixed or variable mortgage.

Interest-only mortgage

With interest-only mortgages you only pay the interest due on the amount you borrowed each month. So while your monthly payments will be less than with an equivalent sized repayment mortgage, you will still owe the amount you originally borrowed when you reach 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 variable rate.

Paying back the capital

Lenders will make sure 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 or 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.

Read our guide Ways of repaying an interest-only mortgage.

Find an independent financial adviser at unbiased.co.uk.

Combined repayment and interest-only mortgages

Some lenders offer mortgages on a part-repayment and 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

Read Understanding different types of mortgages.

Read our guide Choosing a mortgage – how to get the right deal.

Use our Mortgage payments calculator to compare interest rates.

Our Affordability calculator will help you make sure you can afford your monthly repayments.

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