Repayment vs Interest-Only Mortgages
Choosing between a repayment and interest-only mortgage is one of the most important decisions you will make when taking out a home loan. The right choice depends on your financial situation, risk appetite, and long-term plans.
Repayment mortgage
With a repayment mortgage (also called a capital and interest mortgage), each monthly payment includes:
- Interest on the outstanding balance
- A portion of the capital (the amount borrowed)
By the end of the mortgage term, you will have repaid the entire loan. This is the most common type of residential mortgage in the UK and carries the least risk, as your home is guaranteed to be fully paid off at the end of the term.
Interest-only mortgage
With an interest-only mortgage, you only pay the interest each month. The capital balance remains unchanged, and you must repay it in full at the end of the term. Monthly payments are lower, but the total cost is higher. See our interest-only mortgage calculator for a detailed comparison.
Understanding Amortisation
Amortisation describes how your mortgage balance is reduced over time through regular repayments. The key feature of a repayment mortgage is that the split between interest and capital changes throughout the term:
- Early years — The majority of each payment is interest, with only a small amount reducing the capital.
- Middle years — The split becomes more even as the outstanding balance decreases.
- Later years — Most of each payment goes towards capital, with relatively little interest.
This front-loaded interest structure means that overpayments made in the early years have the greatest impact. A £100 overpayment in year 2 saves far more interest than the same overpayment in year 20. Use our mortgage overpayment calculator to model the savings.
Total Cost Comparison
The table below compares the total cost of a £200,000 mortgage at 4.5% across different terms:
| Term | Monthly Payment | Total Interest | Total Cost |
|---|---|---|---|
| 15 years | £1,530 | £75,300 | £275,300 |
| 20 years | £1,265 | £103,600 | £303,600 |
| 25 years | £1,111 | £133,400 | £333,400 |
| 30 years | £1,014 | £164,800 | £364,800 |
| 35 years | £949 | £198,200 | £398,200 |
Extending your term from 25 to 35 years reduces your monthly payment by £162 but costs you an additional £64,800 in interest over the life of the loan. When choosing your mortgage term, balance the need for affordable monthly payments against the total cost.
Early Repayment Options
If your circumstances improve, you may want to repay your mortgage ahead of schedule. Here are your options:
- Regular overpayments — Most lenders allow up to 10% of the balance per year without charges. Even small overpayments make a meaningful difference.
- Lump-sum payments — Make one-off payments when you receive a bonus, inheritance, or other windfall.
- Remortgage to a shorter term — When your deal ends, consider switching to a shorter term if you can afford higher payments. Use our mortgage calculator to compare different terms.
- Full early repayment — Pay off the entire mortgage, though early repayment charges may apply during a fixed-rate period.
Always check your mortgage terms for any early repayment charges (ERCs) before making significant overpayments. Our mortgage affordability calculator can help you assess whether you have capacity to increase your payments.