When you take out a mortgage to buy a home, one of the most fundamental decisions you’ll make is centred around how you’ll pay it back. It might seem complex with various deals and rates advertised, but it generally boils down to two main approaches for repaying the money you borrow. Understanding the difference is crucial for your long-term financial health.

Today, we’ll be explaining Interest-Only vs Repayment Mortgages as simply as possible. We’ll break down how each type of borrowing works, before highlighting the key differences so you can start to understand which approach best aligns with your circumstances and financial plans.

 

 

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What is a repayment mortgage?

A repayment mortgage is the most common type of mortgage for homebuyers in the UK. With these mortgages, each monthly payment you make is split into two parts:

  • The interest: This portion covers the monthly interest charged by the lender for borrowing the money.
  • The capital: With this portion, you’ll be paying back a small part of the original loan amount itself.

Over the life of the mortgage the proportion of capital you repay each month gradually increases. As long as you keep up with all your payments this method guarantees that your entire mortgage debt will be cleared by the end of the agreed term so you’ll then own your home outright and in full.

What is an interest-only mortgage?

Interest-only mortgages work differently to the more-common repayment mortgage. As the name suggests, with these mortgages, monthly payments cover only the interest being charged that month. That means you’re not actually paying back any of the original capital amount you borrowed month to month.

As a result, at the end of the mortgage term the full amount you initially borrowed is still outstanding. This means a crucial requirement for an interest-only mortgage is having a separate credible and guaranteed plan in place to repay the entire capital sum in one go when the term finishes.

In the past more people used interest-only borrowing to buy their main homes. But since the 2008 financial crisis, getting an interest-only mortgage for your primary residence has become significantly harder. Lenders now have very strict criteria due to the higher risks involved and they are generally only available in specific circumstances often requiring large deposits or significant equity. Interest-only mortgages remain popular for property professionals building buy-to-let portfolios.

What are the key differences?

Now you understand a bit more about how each of these types of mortgages work, it’s time to compare Interest-Only vs Repayment Mortgages so you are better placed to decide which is right for you:

1. The monthly payments

These will typically be lower at first with interest-only borrowing as you’re not repaying any capital.

2. Debt reduction

With a repayment mortgage your balance decreases over time, unlike with an interest-only mortgage where you don’t repay the capital until the end

3. End of the term

The loan is fully paid off with a repayment mortgage (if payments are maintained). The full original loan amount must be repaid in a lump sum with an interest-only mortgage.

4. Risk

Risk is considered to be much lower for repayment mortgages. Lenders generally consider interest-only mortgages to be higher risk because people need to be able to repay the capital separately.

5. Availability

Repayment mortgages are widely available to the general mortgage but interest-only mortgages have stricter lending criteria and are therefore harder to obtain for residential properties.

What do you need for an interest-only mortgage?

Here it’s useful to think about things from the lender’s perspective. When applying for an interest-only mortgage, lenders are generally looking for absolute confidence that the borrower will be able to repay the capital at the end of the term.

This means potential borrowers need to provide solid proof of a repayment strategy. Common strategies lenders might consider (subject to strict checks) include:

  • Sale of the mortgaged property (only usually viable if you have substantial equity and clear onward plans).
  • Sale of other properties or assets (like shares or investments).
  • Significant savings or investment portfolios

Less commonly, lenders might consider using funds from an endowment policy.

In all cases, lenders will scrutinise your plan, assess its reliability and may review it during the mortgage term. They also typically require a much larger deposit or existing equity in the property compared to a repayment mortgage.

Interest-Only vs Repayment Mortgages: Pros and cons

Let’s summarise the main advantages and disadvantages of these two types of mortgage:

For repayment mortgages:

Pros

  • Certainty the loan is being paid off
  • Lower overall risk
  • Peace of mind
  • Widely available
  • Security of owning the home outright at the end

Cons

  • Higher monthly payments
  • Reduce disposable income month-to-month.

For interest-only mortgages:

Pros

  • Lower monthly payments freeing up cash flow for other uses (like investments intended to build the repayment fund).

Cons

  • High risk if repayment plan fails
  • Capital debt doesn’t reduce
  • Requires significant discipline
  • Strict lending criteria
  • Less certainty
  • Potential stress
  • Failure to repay can lead to losing your home.

Which type is right for you?

The choice between Interest-Only vs Repayment Mortgages depends heavily on your financial situation, risk appetite and long-term goals.

But in general, a repayment mortgage is suitable for:

  • The vast majority of homebuyers, particularly first-time buyers.
  • Anyone seeking the security of knowing their mortgage debt is decreasing.
  • Those who want the certainty of owning their home outright at the end of the term.

An interest-only mortgage is a niche product and might only be considered by:

  • Individuals with very large deposits or equity significant verifiable incomes and a clearly documented watertight repayment strategy.
  • Some buy-to-let investors (where rental income covers interest and the property sale is the repayment plan though criteria still apply).

Crucially anyone considering this route must seek professional financial advice due to the complexity and significant risks involved.

OneDome is here to help

Choosing a mortgage is complex but OneDome is here to help. If you have any questions about the specifics of mortgages, the wider mortgage process or want tailored advice on the different types of mortgages that suit your situation you can:

Important: Your home may be repossessed if you do not keep up repayments on your mortgage.