Interest-Only vs Repayment Mortgages UK

By Kristian Derrick

Last Reviewed: 2nd February 2024

With so many mortgage types available on the market, it can seem a little overwhelming.

Two popular mortgage types in the UK are undoubtedly interest-only mortgages and repayment mortgages. 

According to a report by Statista, in 2022, interest-only mortgages in the UK made up 12% of the market share with an even split between fixed-rate and variable interest options.

The same report tells us that in the same year, 86% of mortgages were repayment mortgages, with 73% on a fixed rate and 13% on a variable rate.

Property buyers, especially first-time buyers, may wonder if they should look for a capital repayment mortgage or an interest-only mortgage, and that’s what you’re about to find out!

Repayment Mortgages and Interest-Only Mortgages in the UK at a Glance

Repayment Mortgage Interest-Only Mortgage
Repayment of loan Pay back a portion of the interest and the capital amount each month Pay back only the interest amount in instalments each month.
At the end of the term At the end of the term, you’ll have paid of the property in full At the end of the loan term, you’ll need to settle the capital amount as a lump sum
Payment amount Higher monthly payments than an interest-only loan Lower monthly payments than a repayment loan

What’s the Difference Between Repayment Mortgages and Interest-Only Mortgages?

Mortgages need a repayment strategy, and that’s why choosing the right type of mortgage is important.

If you cannot pay your monthly instalments, the lender may repossess the property! Understanding what sets interest-only and repayment mortgages apart is important. 

Interest-only mortgages cater to paying off only the total interest charged on the mortgage. 

Repayment mortgages focus on paying back the total amount, including a portion of the interest and capital amount. 

You may find that interest-only mortgages have lower monthly instalments attached, but that doesn’t particularly mean that interest-only mortgages are the best route.

If you don’t have a lump sum available at the end of the loan to pay off the capital amount, you’ll find yourself in a financial pickle.

A Closer Look at an Interest-Only Mortgage in the UK

While interest-only mortgages in the UK come with lower monthly instalments, they come with a big downside: the large lump sum you’ll have to pay towards the capital amount borrowed at the end of the term.

Applying for this type of mortgage is only recommended if you’re certain you’ll have the lump sum available at the end of the term.

Most borrowers have an asset or an investment they plan to sell or withdraw from at the end of their interest-only mortgage to settle the outstanding amount.

Popular investments to pay off an interest-only mortgage’s capital amount include a pension, investment fund, or ISA.

The sale of an asset, such as property or using an inheritance, is also accepted. 

It’s important to note that a mortgage provider won’t grant such a loan to someone who doesn’t have a definitive repayment strategy to present. This will be checked for viability during the loan application. 

It’s hard not to be attracted to an interest-only mortgage in the UK.

After all, you’ll be paying a lower monthly instalment, which provides a bit of breathing room, and you’ll enjoy greater control over your investments and how you’ll save towards the final payment.

There’s always the risk of your intended repayment plan for the capital amount falling through or not performing, which means that interest-only mortgages aren’t suited to people who don’t have a solid repayment strategy. 

A Closer Look at a Repayment Mortgage in the UK

One of the perks of a repayment mortgage in the UK is that with each monthly payment, you’re reducing the total amount you owe. At the end of the term, there’s no lump sum to worry about.

You’ll have paid off the total loan and the property will be yours – no additional fees required. 

With repayment mortgages, the amount of interest you pay over the total term of your loan is less because you’ll be actively reducing the total amount owed each month.

As the term of your mortgage progresses, you may even find that you’re eligible for lower interest rates as the total outstanding has reduced. 

There’s less risk involved as you won’t need to have a repayment strategy for a large lump sum at the end of your loan term. Instead, you’ll own the property outright. 

Switching Between Mortgage Types

It’s fairly common for buyers on an interest-only mortgage in the UK to consider switching to a repayment mortgage.

While this can be tricky because you will be moving into a much higher monthly instalment, some lenders will approve such a switch.

The options are varied, including:

  • Opting for a part and part mortgage where you can make payments towards your outstanding capital amount as well.
  • Keep the same term and interest rate while switching to a repayment mortgage with your existing mortgage provider.
  • Opting to apply for a new repayment mortgage deal with your current mortgage provider. 
  • Approaching a new lender to remortgage your existing deal onto a repayment mortgage option.

Using a Professional Mortgage Broker

If you intend to switch between mortgage types, it’s always best to acquire the assistance of a professional mortgage broker or advisor who can advise you on the mortgage providers to approach, what to do to increase your chances of approval, and also, to help you search the market for better deals that may save you money in the long run.

Consulting with a mortgage broker may save you time and hassle, making the process of buying a property or switching from one mortgage type to another less of a headache.

Call us today on 01925 906 210 or contact us to speak to one of our friendly advisors.

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