What is a repayment mortgage?
When you make monthly repayments, they go towards clearing some of the mortgage balance as well as paying the interest owed on it.
The amount you pay each month is calculated so that you pay off the full amount owed by the end of the mortgage term, which is usually around 25 years. You will own your property outright once your mortgage is paid off.
What is an interest only mortgage?
Your monthly repayments only go towards the interest on your mortgage, not on reducing the total amount you owe.
This means the repayments will be lower, but you will still owe the same at the end of the term as when you took out the mortgage.
You will need to repay the whole balance at the end of your mortgage term to own the property fully by:
Using a repayment vehicle, which includes any kind of savings plan like an ISA, investment fund or pension
Using a lump sum you get before the mortgage ends, like an inheritance or pension withdrawal
You could also choose to sell the property to pay back what you owe to your lender.
You need to agree a repayment plan with your lender because they need to see evidence of how you will save up to repay the mortgage balance at the end of its term.
Lenders each have different criteria on what kind of repayment vehicle you need, but many will not accept an expected inheritance or increase in property prices.
How much do they cost?
A mortgage for £160,000 with a 4% interest rate would cost:
|Type||Total cost||Interest paid|
Repayment mortgages cost less overall but come with higher monthly repayments than interest only mortgages. For example, the above £160,000 mortgage would cost:
£841.05 per month with a repayment mortgage
£553.92 per month with an interest only mortgage
Here is a guide to the fees, interest charges and other costs that come with repayment and interest only mortgages.
Which is best?
The advantages of repayment mortgages are:
You pay less interest overall because what you owe decreases every month. Later in the mortgage's term, more of each payment goes towards clearing the balance.
Lower interest rates later in the mortgage term because you can get better deals once your outstanding balance is smaller.
You will own your home at the end of the mortgage term if you make all of your repayments.
However, the monthly repayments will be higher than if you get an interest only mortgage, so make sure you will be able to afford them.
Interest only mortgages
The advantages of interest only mortgages are:
Lower monthly payments because they only cover the interest.
More flexibility to choose where your money goes. You can decide how you will save to pay back the mortgage balance or use some towards home improvements.
You could make a profit if your investments perform well. You could save up enough to pay off your mortgage more quickly or keep a lump sum to buy something else.
The disadvantages of interest only mortgages are:
More expensive overall because the amount you owe will not decrease over the mortgage term. This means that the amount of interest you pay will not go down either unless you get a deal with a lower interest rate.
More complicated to look after because your mortgage and the repayment vehicle are separate.
More risky than repayment mortgages if your repayment vehicle performs badly.
If your repayment vehicle relies on investments, pension funds, an inheritance or a rise in house prices, it may not make enough to pay off your mortgage.
Choose which is right for you
Interest only mortgages do not suit most borrowers. Only get one if you are aware of the risks and have a repayment plan to save enough capital by the end of the term.
You would need to be able to make a profit from your investment vehicle and preferably have a backup option to help you pay off the mortgage.
Yes, many buy to let mortgages are repaid on an interest only basis. You can could use the rent payments you receive to cover the interest payments on the mortgage. The interest you pay on a buy to let mortgage can be offset against your rental income for tax purposes.
When the mortgage term ends you could sell the property to pay off the mortgage balance. This would only work if house prices at least stayed the same over the mortgage term. If house prices rose, you would be able to make a profit on the investment.
Part and part mortgages
You can get a mortgage split between repayment and interest only. Part of each payments you make will go towards the mortgage balance and some will go towards just the interest.
Your balance will go down every month but there will still be an amount left to pay at the end of the mortgage term.
How to get a mortgage
Decide what type of mortgage you need and then compare mortgages online to find the best deal:
When you have found the mortgage you want, here is a guide to the full process of applying for a mortgage and buying a home.
You can get interest only or repayment mortgages that come with the following interest rate types:
Fixed rate mortgage interest rates stay the same for a set period.
Tracker mortgage interest rates go up and down with the Bank of England base rate.
Variable mortgage interest rates can change at any point.
Discount mortgage interest rates track set the lender's standard variable rate, usually at one or two percent below it.
Here is how to work out which type of interest rate is right for you.
Can you switch from one to the other?
Yes, you can switch from a repayment mortgage to an interest only mortgage, although the total amount you repay is likely to increase
You can also switch from an interest only mortgage to a repayment mortgage, although your monthly mortgage repayments will increase
Here is how to switch to a new mortgage deal and how much it costs.