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What is the difference between an interest-only mortgage and a repayment mortgage?

Interest-only mortgages and repayment mortgages can be popular options for homebuyers. Let’s find out which of these routes might appeal to you!

When you’re working out which mortgage repayment method you’d like to go for, there are a whole host of options that you can choose from. One distinction that we think is vital to know is the difference between a repayment mortgage and an interest only mortgage. Let’s find out which one is best for you!

What is an interest-only mortgage?

An interest-only mortgage is basically where you only repay the mortgage interest per month as opposed to paying off any capital (the amount you owe). This can be a great option for first-time buyers or for those with bad credit. Why? If you’re in a position where you think you might be struggling financially, this option will allow you to pay a smaller payment per month, so you can settle any outstanding debts that you might have.

However, readers, make sure that if you go for this option that you’re financially disciplined. This is because at the end of the mortgage term you will need to pay your capital off in full. So, we recommend that you make sure you have a sufficient means of saving the money when the time comes to pay the capital at the end of the mortgage term.

Because in the past so many people opted for an interest-only mortgage to enjoy lower monthly payments without allowing for the fact that they would still owe the full amount borrowed at the end of their mortgage term the mortgage industry have tightened the criteria around interest-only mortgages. Now lenders who will entertain an interest-only mortgage want minimum criteria to be met. It may be that they require you to have a minimum of £150,000 in equity at the time of application so that, come the end of your mortgage term, down-sizing & being mortgage free is a realistic option. Others insist on a minimum income of £100,000 so that monthly overpayments are a real option. Whatever the criteria, it's likely that your affordability will be accessed as if you were applying for a full repayment mortgage as the lender needs to satisfy the FCA that they ensured the mortgage was affordable to you at the time of application.

Repayment mortgages:

This is a slightly more conventional and well-trodden path for homeowners. With a standard repayment mortgage, you will have to pay interest each month alongside a small portion of the capital that you owe. This means at the end of your mortgage term, which typically last 25-30 years, you will have full ownership of the house with no mortgage amount outstanding!

Which one should you go for?

To be honest, there isn’t a right answer to this question. While interest-only mortgages might seem like an easy mortgage payment option for you, make sure you are planning for the end date of your mortgage by having sufficient savings, investments or pensions investments adding up to in excess of your outstanding mortgage amount. These need to be constantly monitored as much of your final value is linked to the stock market so, although positive fluctuations may see you receiving a windfall, negative movements could see you short of funds when its time to repay your mortgage. 

With a repayment mortgage, you can rest easy in the knowledge that, as long as you make your monthly mortgage payments, at the end of the mortgage term your home will be your own & you will be mortgage debt free.

Alternatively, if you need any more advice then don’t be afraid to contact our team of experts at Mortgages Online. We can provide you with up to date information on mortgage repayments, interest-only mortgages, repayment mortgages and which one best suits you!

Our service at MO is completely free to use – so no need to get your credit card out your wallet/purse/bag/pocket.

For more information for first-time buyers and everything else mortgage-related, visit our Articles page.

PaulFlavin

Paul Flavin

Paul Flavin is the Managing Director of Mortgages Online and has been working in the mortgage industry for over 20 years. Running a successful independent mortgage broker since 2010, Paul oversees Mortgages Online and creates articles regularly – drawing on his years of mortgage experience.

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