Repayment vs Interest-Only Mortgage Comparison Calculator
Repayment mortgages build equity with every payment; interest-only mortgages have lower monthly payments but leave the capital outstanding at the end. Use this calculator to compare costs, total paid,
Repayment vs Interest-Only Mortgages
Repayment Mortgage
- Each monthly payment covers both interest AND a portion of the capital
- Guaranteed to be paid off at the end of the term
- Higher monthly payments but building equity from day one
- Suitable for: most residential buyers
Interest-Only Mortgage
- Monthly payments cover interest only — capital stays the same throughout
- Lower monthly payments but capital remains outstanding at end of term
- Requires a repayment vehicle (savings, investments, pension) to repay capital
- Now mainly available for: buy-to-let landlords, high-net-worth residential borrowers
True Cost Comparison
Interest-only appears cheaper month-to-month, but you must also save or invest the capital to repay the loan at the end. A repayment mortgage is almost always more cost-effective over the full term because:
- Capital is reducing, so interest charged decreases each month
- No need for a separate repayment vehicle (which has its own costs and risks)
The Amortisation Effect
In early years of a repayment mortgage, payments are mostly interest. In later years, more goes to capital repayment. Example: £200,000 at 5%, 25 years. Year 1: ~£833 interest, ~£232 capital. Year 20: ~£480 interest, ~£585 capital.
Frequently Asked Questions
Is a repayment or interest-only mortgage better?
For most residential buyers: repayment is safer — you build equity and are guaranteed to own the property outright at term end. Interest-only is riskier (capital outstanding at end). For buy-to-let: interest-only improves monthly cash flow but relies on property appreciation or savings to repay capital at the end.
Can I still get an interest-only residential mortgage?
Yes, but with restrictions. Since the Mortgage Market Review (2014), residential interest-only mortgages require: a credible capital repayment plan, minimum equity (often 50-75% LTV), and sometimes minimum income thresholds. Available through specialist brokers and private banks. Most high street lenders have stopped offering them for ordinary residential buyers.
What is an offset mortgage?
An offset mortgage links your savings account to your mortgage. Your savings balance offsets the mortgage balance for interest calculation purposes. Example: £200,000 mortgage, £20,000 savings → interest charged on £180,000. You don't earn interest on savings but reduce mortgage interest, which is often more tax-efficient.
How much cheaper is interest-only monthly?
Typically 20-40% cheaper monthly. Example: £200,000 at 5%, 25 years. Repayment: £1,169/month. Interest-only: £833/month (£336 saving). But at the end: £200,000 capital outstanding with interest-only. Total interest paid: repayment ~£150,000; interest-only ~£250,000.
What repayment vehicle is accepted for interest-only mortgages?
Lenders typically accept: stocks and shares ISA, endowment policy (where still in force), pension lump sum (25% tax-free), property sale (if downsizing), investment portfolio. Cash savings are sometimes accepted. ISAs and pensions are the most common modern repayment vehicles.
Can I switch from interest-only to repayment mid-term?
Yes. Contact your lender to switch. You'll need to show affordability at the higher repayment amount. Switching early is usually free, though some lenders may charge a product fee. Financial advisers recommend switching to repayment as soon as possible if you're currently on interest-only without a clear repayment plan.
What is a part-and-part mortgage?
A part-and-part mortgage splits the loan: part is interest-only (lower payment), part is repayment (building equity). Example: £200,000 mortgage split as £150,000 repayment + £50,000 interest-only. This reduces monthly payments vs full repayment while still reducing some capital. The interest-only portion still needs a repayment plan.
Does overpaying a repayment mortgage save money?
Yes, significantly. Even small overpayments reduce the outstanding balance, cutting future interest. Most mortgages allow 10% overpayment per year without early repayment charge. Overpaying £100/month on a £200,000, 5%, 25-year mortgage saves approximately £20,000 in interest and cuts 3 years off the term.