Budget & housing
Repayment vs Interest-Only Mortgage Explained
Repayment mortgages clear the loan by the end of the term; interest-only deals charge less each month but leave the full balance to repay — how they compare, who qualifies and the risks.
Updated September 2026 · 9 min read
General information only — not financial, legal or tax advice. Rates and rules change; check GOV.UK or official resources before making decisions.
Key takeaways
- A repayment (capital-and-interest) mortgage clears the loan by the end of the term — each month you pay interest plus some of the balance.
- An interest-only mortgage charges interest alone, so monthly payments are lower but the full loan amount remains at the end unless you repay it separately.
- On a £200,000 mortgage at 4.5% over 25 years, repayment costs about £1,112 a month; interest-only costs about £750 — but you still owe £200,000 at the end.
- Interest-only deals are harder to get for residential buyers — lenders require a credible repayment plan and often a larger deposit or higher income.
- Repayment is the default choice for most homeowners; interest-only suits specific situations such as buy-to-let or short-term cash-flow needs with a solid repayment strategy.
What is the difference between repayment and interest-only?
A repayment mortgage — also called capital-and-interest — pays off the loan gradually. Each monthly payment covers the interest due plus a slice of the outstanding balance. By the end of the term, you owe nothing and own the property outright.
An interest-only mortgage charges interest on the full loan balance every month but does not reduce what you owe. Your monthly payment is lower, but at the end of the term you still owe the original amount borrowed — unless you repay it through savings, investments, selling the property or another plan.
| Feature | Repayment | Interest-only |
|---|---|---|
| Monthly payment | Higher — includes capital | Lower — interest only |
| Loan balance at end of term | £0 | Full amount still owed |
| Total interest paid | Lower over full term | Higher over full term |
| Equity built each month | Yes — balance falls | No — balance unchanged |
| Typical use | Main home, most buyers | Buy-to-let, specific strategies |
| Availability | Standard for residential | Restricted — repayment plan required |
How repayment mortgages work
On a £200,000 repayment mortgage at 4.5% over 25 years, your monthly payment is about £1,112. Early payments are mostly interest — in month one, roughly £750 is interest and £362 clears capital. By year 20, most of each payment goes towards the balance.
Because the outstanding balance falls each month, the interest portion shrinks over time. That is why overpaying early saves so much — you reduce the balance while interest is still a large share of each payment. Our How Mortgage Repayments Work guide explains the maths in more detail.
How interest-only mortgages work
On the same £200,000 loan at 4.5%, an interest-only payment is about £750 a month — roughly £360 less than repayment. That frees up cash flow, but after 25 years you still owe £200,000.
Lenders require a repayment strategy before offering interest-only on a residential mortgage: ISAs, pensions, endowment policies, selling the property, or other assets. Buy-to-let landlords often use interest-only because rental income covers the interest and they plan to sell or remortgage later.
- Monthly cost: interest on the full balance only.
- Capital: none is repaid during the term unless you make voluntary overpayments.
- End of term: you must repay the full loan — remortgage, sell, or use your repayment vehicle.
- Risk: if your repayment plan underperforms or property values fall, you may not have enough to clear the debt.
Monthly payment comparison: worked example
The table below compares monthly costs on a £200,000 mortgage over 25 years at different rates. These figures use the same formula as our Mortgage Repayment Calculator.
The interest-only column shows how much lower monthly payments are — but remember the full £200,000 remains outstanding throughout and at the end of the term.
| Rate | Repayment | Interest-only | Monthly saving (interest-only) |
|---|---|---|---|
| 4.0% | £1,056 | £667 | £389 |
| 4.5% | £1,112 | £750 | £362 |
| 5.0% | £1,169 | £833 | £336 |
| 5.5% | £1,228 | £917 | £311 |
| 6.0% | £1,289 | £1,000 | £289 |
Total cost over the full term
Interest-only looks cheaper month-to-month, but you pay interest on the full balance for the entire term. On £200,000 at 4.5% over 25 years, interest-only costs about £225,000 in interest alone — plus you still need to repay the £200,000 capital.
Repayment costs about £133,600 in total interest over 25 years because the balance falls each month. That is roughly £91,000 less interest than interest-only — and you own the home outright with no lump sum due.
| Repayment | Interest-only | |
|---|---|---|
| Monthly payment | £1,112 | £750 |
| Total interest over 25 years | ~£133,600 | ~£225,000 |
| Capital still owed at end | £0 | £200,000 |
| Total paid if held full term | ~£333,600 | ~£425,000 + £200,000 capital |
Who can get an interest-only mortgage?
Since the 2008 financial crisis, interest-only residential mortgages have become much harder to obtain. Lenders tightened rules after many borrowers reached the end of their term with no way to repay the capital.
Today, interest-only is mainly available for buy-to-let landlords, high-net-worth borrowers with substantial assets, or those switching from an existing interest-only deal. Residential interest-only usually requires a minimum 25% deposit, a high income and a detailed, credible repayment plan.
- Buy-to-let: common — landlords often prefer lower monthly costs and plan to sell or remortgage.
- Residential: rare for new borrowers — lenders want evidence you can repay the capital.
- Repayment vehicle: ISA, pension, investments, downsizing plan or sale of another property.
- Minimum deposit: often 25% or more for residential interest-only.
The risks of interest-only
The biggest risk is reaching the end of the term without enough to repay the loan. Endowment policies sold in the 1980s and 1990s famously underperformed, leaving homeowners unable to clear their mortgages.
Property prices can fall — you might owe more than the home is worth. If you planned to sell to repay the loan, a downturn could leave a shortfall. Interest-only also builds no equity from repayments — you rely entirely on property price growth.
- Repayment plan failure: savings or investments may not grow as expected.
- Negative equity: property value below the outstanding loan.
- Rate rises: interest-only payments increase with rates, with no capital reduction to offset.
- Remortgage difficulty: lenders may not offer a new interest-only deal at the end of the term.
When repayment makes more sense
Repayment is the right default for most people buying a home to live in. You gradually own more of the property, pay less total interest, and face no lump-sum repayment at the end.
Choose repayment if you want certainty, are a first-time buyer, do not have a separate investment plan to clear the loan, or simply want the mortgage gone by retirement.
When interest-only might make sense
Interest-only can suit buy-to-let investors who want lower monthly costs and plan to sell the property or remortgage before the term ends. Rental income covers the interest, and the full loan is repaid from the sale proceeds.
Some high earners with significant investments use interest-only to free cash flow, confident their ISA or pension will cover the capital at the end. This requires discipline and a realistic plan — not hope that property prices will bail you out.
- Buy-to-let with a clear exit strategy (sell or remortgage).
- Short-term ownership — you plan to sell within a few years.
- Strong separate investments earmarked to repay the capital.
- Cash-flow priority — you invest the monthly saving at a return above the mortgage rate.
Can you switch between repayment and interest-only?
Many lenders let existing customers switch from repayment to interest-only temporarily — for example, during a career break or redundancy — or from interest-only to repayment if you want to start clearing the balance.
Switching to interest-only reduces monthly payments but extends the time until you are mortgage-free unless you overpay. Switching to repayment increases payments but builds equity faster. Check fees and whether your lender requires a new affordability assessment.
Part repayment, part interest-only
Some lenders offer split mortgages — for example, 50% on repayment and 50% on interest-only. This lowers monthly payments compared with full repayment while still reducing part of the balance each month.
On a £200,000 mortgage split equally at 4.5% over 25 years, you might pay about £931 a month instead of £1,112 for full repayment — and owe £100,000 at the end rather than zero. You still need a plan for the interest-only portion.
How to model your own numbers
Use our Mortgage Repayment Calculator to compare repayment and interest-only payments at your loan amount, rate and term. Then use the Mortgage Affordability Calculator to see what you could borrow on each basis — interest-only may let you borrow more on paper, but remember the capital still needs repaying.
If you are weighing interest-only to free up cash for investing, compare the mortgage rate against expected investment returns — our Overpay Mortgage or Invest? guide covers that trade-off in detail.
Frequently asked questions
- Is interest-only cheaper than repayment?
- Interest-only has lower monthly payments because you only pay interest, not capital. But you pay interest on the full balance for the entire term, so total interest is higher. At the end you still owe the full loan amount. Repayment costs more each month but clears the debt and costs less interest overall.
- Can I get an interest-only mortgage for my home?
- It is possible but difficult for residential buyers. Lenders require a large deposit (often 25%+), a high income and a credible repayment plan showing how you will clear the capital. Buy-to-let interest-only is much more widely available.
- What happens at the end of an interest-only mortgage?
- You must repay the full loan balance — typically by remortgaging, selling the property, or using savings or investments from your repayment plan. If you cannot repay, you may need to sell the home or face repossession.
- Should first-time buyers choose repayment or interest-only?
- Repayment is almost always the better choice for first-time buyers. It builds equity from day one, requires no separate repayment plan, and most lenders will not offer interest-only to new residential borrowers anyway.
- Can I overpay on an interest-only mortgage?
- Yes — most lenders allow overpayments on interest-only deals, which reduces the outstanding balance. This is a good way to build equity if you chose interest-only for cash-flow reasons but have spare money to put towards the loan.
- What is a repayment vehicle?
- A repayment vehicle is the plan or asset you use to repay the capital at the end of an interest-only term. Common examples include ISAs, pensions, endowment policies, stocks and shares investments, or the proceeds from selling the property or downsizing.
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