Compare Interest-Only vs Repayment Mortgage
Frequently Asked Questions
With a repayment (capital and interest) mortgage, monthly payments cover both interest and repay the capital, so the mortgage is fully repaid at the end of the term. Interest-only mortgages charge only interest — the capital remains outstanding and must be repaid separately.
Interest-only is mainly available for buy-to-let mortgages and for high-equity (low LTV) residential mortgages. After the 2008 financial crisis, residential interest-only became much harder to obtain — lenders require a credible repayment plan.
Acceptable repayment vehicles include: ISA or investment portfolio, pension (where rules allow), sale of the property, endowment policy, or other assets. Cash savings are generally not accepted as a standalone vehicle.
Monthly payments are lower, but you pay more total interest (as the capital never reduces). The net cost depends entirely on whether your repayment vehicle performs well enough to repay the balance.
Many borrowers in the 1990s-2000s had endowment mortgages (interest-only + endowment policy to repay capital). Endowments underperformed, leaving massive shortfalls when mortgages matured. This led to strict regulation.
Yes. Switching increases your monthly payments but ensures the mortgage is repaid. Many lenders allow this without remortgaging. Some allow partial switches (part repayment, part interest-only).
A mortgage that is partly repayment and partly interest-only. This reduces monthly payments vs full repayment while ensuring some capital is repaid. Becoming more common as a compromise.
Many BTL landlords use interest-only to maximise cash flow. The property's capital growth (or sale) is the intended repayment vehicle. Interest-only payments are also tax-deductible at basic rate under Section 24 rules.
After 25 years, you still owe the full original mortgage amount. If property values fall, you might owe more than the property is worth. If your repayment vehicle underperforms, you face a significant shortfall.
Yes. Overpayments on interest-only mortgages reduce the capital balance, reducing future interest. Check your mortgage terms — most allow 10% overpayment per year without ERC.
Lenders will seek repayment. Options include: sell the property, remortgage to a new interest-only or repayment deal, or convert to a lifetime mortgage (equity release) if you're older.
Overpaying permanently reduces the balance and future interest — similar effect to offsetting. The difference is overpayments cannot be accessed again (unless you remortgage), whereas offset savings remain accessible.