In this brief guide, we will discuss the difference between interest-only and repayment mortgages.

The difference between interest-only and repayment mortgage

With an interest-only mortgage, you will only repay an interest charge on the balance outstanding and make no repayments towards the actual initial capital borrowed whilst with a repayment mortgage you will make monthly repayments which go towards the capital borrowed on your mortgage. At the end of the mortgage term, you will, therefore, owe nothing.

When considering what mortgage to take you be wondering what the difference between an interest-only mortgage and a repayment mortgage is.

Below we will elaborate on the differences between an interest-only mortgage and a repayment mortgage.

Interest-only mortgage vs repayment mortgage

Interest-only mortgageRepayment mortgage
Interest-only mortgages have lower monthly payments:
This is because interest-only mortgages do not contain any capital repayment in their monthly mortgage repayments but instead they only contain the interest being charged on the balance outstanding.
At the end of the mortgage term, you will then need to pay the balance outstanding. This may be the total balance borrowed if you did not make any repayments towards the balance outstanding during the mortgage term.

Repayment mortgages have higher monthly payments:
This is due to the fact that the monthly mortgage repayments of a capital repayment mortgage will contain both the interest element and the capital element.
At the end of the mortgage term, you would have repaid the balance borrowed in full.
Interest-only mortgages require capital repayment vehicles:
Due to the fact that you will need to repay the capital borrowed at the end of the mortgage term in one large sum, the mortgage lender will need to check that you are able to do this by asking for a capital repayment vehicle which you will use and then verifying that this is an acceptable capital repayment vehicle for your interest-only mortgage. The mortgage lender will also regularly check to see that your capital repayment vehicle is still on track to repay the interest-only mortgage balance at the end of the mortgage.
Some of the most common capital repayment vehicles include:
Endowment policiesInvestments such as ISAsSale of a propertySavingsSale of the propertyRemortgaging to a capital repayment mortgage by changing your interest-only mortgage to a repayment mortgage.Funds from an equity release
Repayment mortgages do not require capital repayment vehicles:
Repayment mortgages do not require capital repayment vehicles as the capital borrowed will be repaid at the end of the mortgage term through the monthly mortgage repayments.
Interest-only mortgages have stricter mortgage affordability requirements:
Due to the fact that you need to have a capital repayment vehicle, you will find that getting gan interest-only mortgage will be much harder than getting a capital repayment mortgage.
The main difference is the mortgage lender will need to verify your capital repayment vehicle as being suitable.
Repayment mortgages have less strict mortgage affordability requirements:
As repayment mortgages do not require you to have a capital repayment vehicle, you will find that the mortgage affordability requirements are more relaxed than those of an interest-only mortgage.

Interest-only mortgage calculator

You can use an interest-only mortgage calculator to see what your monthly mortgage repayments could be and what the balance outstanding at the end of your mortgage term could be.

Repayment mortgage calculator

You can also be able to use a repayment mortgage calculator to see what your monthly mortgage repayments could be based on your mortgage deposit.

Remember these mortgage calculators only provide you with an indication of what you may be able to borrow.

To see what you could actually borrow you will need to make a mortgage application with a mortgage lender. You could initially get a mortgage in principle before going on to apply for a mortgage offer. 

Using a mortgage broker

You may want to consider using an independent mortgage broker to get a mortgage.

Mortgage brokers are important as they can access mortgage products from across the whole of the market in some cases. This could be over 11,000 mortgage products. This may have some advantages than going directly to a mortgage lender.

A mortgage broker will look to understand your financial circumstances and then provide recommendations on which mortgage products may be suitable for you.

After giving you these mortgage recommendations, most mortgage brokers will seek your consent to apply for a mortgage in principle. 

This will allow you to shop for your home easier as more estate agents and sellers may take you seriously or it will give you confidence that your remortgage is indeed a possibility before you make a full mortgage application. 

Once you have found a home you want to buy or are satisfied with the mortgage offer for your remortgage then the mortgage broker will then look to get you a mortgage offer.

This will come with a key facts illustration document which details out the features of your mortgage including how much you will pay per month if there are any limits such as early repayment fees, or annual overpayment limits.

If you are happy with everything you can then go on to secure your mortgage with the help of a conveyancer. Your conveyancer will manage the legal searches on the property to ensure there aren’t any issues with it, they will oversee the sales agreement to ensure it is in your best interest, they will manage the transfer of mortgage funds, exchange contracts with the seller or their conveyancer and set a completion date with the seller or their conveyancer.

In this brief guide, we discussed the difference between interest-only and repayment mortgages. If you have any questions or comments please let us know.

John Bate

John has 22 years of experience in financial services. This spans across financial research, financial services (As a qualified mortgage broker and underwriter), financial trading and sales at global investment banks. While working as a publishing research analyst, he covered European bank credit and advised institutional clients on investment strategies at both JP Morgan and Societe Generale. John has passed all three levels of the CFA (Chartered Financial Analyst) programme.