Repayment vs interest-only mortgage: the real difference

The short answer: a repayment mortgage clears the loan by the end of the term. An interest-only mortgage costs less each month, but you still owe the full amount at the end. On £200,000 at 6% over 25 years, repayment is about £1,289 a month and interest-only about £1,000. Interest-only also costs far more in total interest.

Side by side

Interest-only costs £113,419 more in interest because the balance never falls. And at the end, you still need £200,000 to clear it.

How a repayment mortgage pays down

Early payments are mostly interest. In the first year, about £3,560 of the £15,463 you pay goes towards the loan. That share grows every year:

This is why overpaying early saves so much interest. See what overpaying £100 a month does.

When interest-only can make sense

• Buy-to-let: the norm, because rent covers the interest and the plan is to sell the property.
• A solid repayment plan: such as an investment portfolio, a pension tax-free lump sum or a large expected sum, which a lender will check.
• Retirement interest-only mortgages for older borrowers, repaid when the home is sold, they move into care or die.
• Short-term cash flow, such as a few months on interest-only after losing income, agreed with your lender.

The risks

• Repayment shortfall: if investments underperform, you may not have enough at the end, and could need to sell.
• No equity growth from payments: your stake only grows if the property rises in value.
• Harder to remortgage: lenders tighten criteria, and older borrowers can struggle to find a new deal.
• Higher total cost, as the table shows.

What lenders want for interest-only

For a home you live in, interest-only is a specialist product now. Typical lender requirements include:

• A large deposit: often at least 25% to 50% of the property value.
• A high income: some lenders set minimums of £75,000 to £100,000 for a single applicant.
• An acceptable repayment plan: investments, pensions or other property, with evidence, and checks during the term. Plans to sell the home are accepted only if you would still have enough equity to buy somewhere else.
• An age limit: the loan usually has to end by a set age, unless it is a retirement interest-only mortgage.

Buy-to-let is different. Lenders look at the rent instead of your salary, usually wanting it to cover 125% to 145% of the interest at a higher test rate.

If you already have an interest-only mortgage

1. Check your repayment plan: what is it worth now, and what will it realistically be worth when the term ends?
2. Work out the gap: if the plan falls short, the earlier you know, the more options you have.
3. Talk to your lender early. They must treat you fairly and may let you switch part of the loan to repayment, extend the term or make overpayments.
4. Consider overpaying. Most deals allow up to 10% a year, which cuts the balance directly.
5. Get advice from a mortgage adviser, or free help from MoneyHelper, if you are near the end of the term with no clear plan.

Switching to repayment: the cost

Switching £200,000 from interest-only to repayment over 25 years raises the payment from £1,000 to £1,289, an extra £289 a month. Switching later costs more each month because there are fewer years left to clear the same balance. Over 15 years, for example, the repayment would be about £1,688 a month.

Part and part

Some lenders let you split the loan, say half repayment and half interest-only. On these figures, that is £1,144 a month, with £100,000 left at the end. It can be a stepping stone if you are moving from interest-only towards repayment.

Which to choose

For a home you live in, repayment is the default and what most lenders offer. Interest-only only makes sense if you have a clear, realistic way to repay the loan. If cutting the monthly payment is the aim, compare a longer term instead: see 25, 30 or 35-year mortgage and fixed vs tracker vs variable.

Figures use an example rate of 6% for illustration. This is general information, not mortgage advice.