Repayment Mortgage
A mortgage where monthly payments repay interest and capital.
Read term →What is Interest-Only Mortgage?
An interest-only mortgage is a mortgage where your monthly payments cover the interest, but not the original amount borrowed.
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Definition
An interest-only mortgage is a mortgage where each monthly payment only covers the interest. The original mortgage balance still needs to be repaid at the end of the term.
Interest-only mortgage in plain English
With an interest-only mortgage, your monthly payment is lower because you are not repaying the mortgage balance each month. You are only paying the interest charged by the lender.
The important part is what happens later. If you borrow £250,000 on an interest-only mortgage, you still need to repay that £250,000 at the end of the mortgage term unless you have already made separate capital repayments.
How an interest-only mortgage works
The monthly payment is based on the mortgage balance and the interest rate. Unlike a repayment mortgage, the payment does not gradually clear the original loan.
Monthly interest-only payment =
mortgage balance × annual interest rate ÷ 12
Example:
£250,000 × 5% ÷ 12 = £1,041.67 per month
This explains why interest-only can look cheaper each month. The payment is lower because the capital has been left out of the monthly repayment.
Key risk: the lower monthly payment does not mean the mortgage is being cleared. The capital still needs a repayment plan.
Interest-only mortgage example
On a £250,000 interest-only mortgage at 5%, the estimated monthly payment is £1,041.67. Over 25 years, the interest paid would be £312,500 if the rate stayed the same, and the original £250,000 would still need to be repaid.
Mortgage
£250,000
Interest payment
£1,041.67/month at 5%
Balance left
£250,000 at term end
Simple test: an interest-only mortgage is not just about affording the monthly payment. It is also about proving how the final balance will be repaid.
Compare interest-only and repayment payments
Use the UK Mortgage Repayment Calculator to compare repayment and interest-only monthly payments using your own mortgage amount, rate and term.
What repayment plan means
A repayment plan is the way you expect to clear the original mortgage balance at the end of the term. It is separate from the monthly interest payment.
Possible repayment plans might include savings, investments, pension-related plans, sale of another property, sale of the mortgaged property, or another lender-accepted method. The lender decides what it is willing to accept.
- Savings: cash built up separately to repay the capital.
- Investments: investments intended to grow enough to clear the mortgage.
- Property sale: selling the property or another asset to repay the loan.
- Switching mortgage type: moving to repayment or another suitable mortgage later, if affordable and accepted.
- Pension-related strategy: using pension income or tax-free cash where suitable and allowed.
Important: a hope that house prices will rise is not the same as a reliable repayment plan.
Interest-only mortgage vs repayment mortgage
The main difference is whether the monthly payment reduces the balance. Repayment mortgages are designed to clear the mortgage over time. Interest-only mortgages are not.
| Feature | Interest-only mortgage | Repayment mortgage |
|---|---|---|
| Monthly payment | Usually lower | Usually higher |
| What the payment covers | Interest only | Interest and capital |
| Balance during the term | Usually stays the same unless extra payments are made | Designed to reduce over time |
| End of term | Capital still needs to be repaid | Loan should be cleared if payments are made |
| Main risk | No suitable capital repayment plan | Higher monthly payment |
Interest-only can improve short-term cash flow, but repayment usually gives a clearer path to owning the home outright.
Who an interest-only mortgage may suit
Interest-only is usually more suitable for borrowers who understand the capital repayment risk and have a credible plan to repay the loan.
- Borrowers with a strong repayment strategy accepted by the lender.
- Buy-to-let investors who manage property cash flow differently from residential homeowners.
- Borrowers with irregular income who can make lump-sum repayments separately.
- Older borrowers using suitable retirement interest-only products.
- Borrowers with assets or investments intended to repay the capital.
For many standard residential buyers, especially first-time buyers, a repayment mortgage is usually easier to understand because the balance is designed to fall automatically.
Main risks of an interest-only mortgage
The biggest risk is reaching the end of the mortgage term without enough money to repay the capital.
- Investment risk: investments may not grow enough to repay the mortgage.
- Property value risk: selling the property may not raise enough if values fall.
- Affordability risk: switching to repayment later may be unaffordable.
- Term-end risk: the lender may expect the capital to be repaid when the term ends.
- Retirement risk: the mortgage could still be outstanding when income is lower.
Red flag: if the mortgage only works because the monthly payment is low, but there is no capital repayment plan, the risk has not disappeared. It has been delayed.
Common interest-only mortgage mistakes
- Comparing only the monthly payment and ignoring the final balance.
- Assuming the lender will extend the mortgage automatically at the end.
- Relying on house price growth without a backup plan.
- Not reviewing the repayment plan regularly.
- Leaving the capital repayment problem until the final few years.
- Assuming interest-only is suitable because it feels more affordable today.