What is a repayment mortgage?

A repayment or capital mortgage is where you repay the capital plus interest over the term of the mortgage in monthly repayments.

Your monthly repayments include both capital and interest.

As you repay your capital, the interest you pay on your mortgage decreases.

Initially most of your monthly repayments will go towards the interest on the mortgage but in time this settles off and becomes a similar percentage of each.

With a repayment mortgage you repay the mortgage in full by the end of the term and as you are slowly repaying the capital every month you begin to own more equity in the property and can remortgage to a better deal in a few years as you will have a better LTV than when you originally got the mortgage.

In a scenario house prices have risen(your property price), you will even have a better LTV and hence better rates for you.

What are the key differences between the interest-only mortgage vs the repayment mortgage?

Monthly payments:

For interest-only mortgages your monthly payments will only include interest payments and no capital

For repayment mortgages your monthly payment will include interest payments and capital payments.

What happens at the end of the term?

For interest-only mortgages at the end of the term you will have to pay the capital in one lump sum.

For repayment mortgages at the end of the mortgage term you will own the property in full.

What is the monthly interest calculated based on?

For interest-only mortgages the interest is calculated on the capital which does not change throughout the term of the loan

For repayment mortgages the interest is calculated on the capital which is constantly reducing as the monthly payments are being made which include capital payments.

Retirement interest only mortgages

Retirement interest only mortgages are mortgages available to people over 55 years old.

With retirement interest only mortgages the mortgage lender will give you a mortgage for the whole or part of your home.

At the end of your mortgage term the mortgage lender will sell your property to get back the capital plus interest they borrowed you.

With a retirement interest only mortgage you can either:

  • Roll up the interest to the end of the mortgage term
  • Pay only interest mortgage repayments per month
  • Pay a monthly mortgage repayment including capital and interest

You can read more about retirement interest only mortgages here.

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.