Repayment vs Interest-Only Mortgages Compared

The choice between a repayment and interest-only mortgage fundamentally affects how you build equity and the total cost of your loan. This guide explains how each works and who they suit.

The Fundamental Difference

Feature	Repayment	Interest-Only
Monthly payment covers	Interest + principal	Interest only
Loan balance over time	Decreases	Stays the same
Equity built	Yes, automatically	Only via price growth
At end of term	Mortgage fully repaid	Full loan still owed
Typical monthly cost	Higher	Lower

How Each Type Works

Repayment Mortgages

Each monthly payment includes:

• Interest on the current balance
• A portion that reduces the principal

Early in the term, payments are mostly interest. Over time, more goes to principal as the balance falls.

Example: £250,000 mortgage, 4.5%, 25 years

• Monthly payment: £1,390
• Year 1: ~£11,000 interest, ~£5,700 principal
• Year 25: ~£500 interest, ~£16,200 principal

At the end: mortgage fully repaid, you own the property outright.

Interest-Only Mortgages

You only pay interest each month. The original loan balance remains unchanged.

Example: £250,000 mortgage, 4.5%, 25 years

• Monthly payment: £937
• Every year: ~£11,250 interest, £0 principal

At the end: you still owe £250,000 and must repay it somehow.

Cost Comparison

Mortgage: £250,000 at 4.5% over 25 years

Type	Monthly Payment	Total Paid	Interest Cost
Repayment	£1,390	£417,000	£167,000
Interest-only	£937	£531,250*	£281,250

*Interest-only total includes repaying the £250,000 loan at the end.

Repayment Strategies for Interest-Only

Lenders require a credible repayment plan before approving interest-only mortgages:

Acceptable Repayment Vehicles

Strategy	How It Works	Lender Acceptance
Sale of property	Sell and downsize/rent	Widely accepted
Investment portfolio	ISAs, shares, etc.	Accepted with evidence
Pension lump sum	Tax-free portion at retirement	Sometimes accepted
Other property sale	Sell buy-to-let/second home	Accepted
Endowment policy	Linked investment plan	Legacy only
Savings	Dedicated savings plan	Accepted with discipline

What Lenders Won't Accept

• "I'll remortgage when the time comes"
• Hope that property prices will rise
• Vague future inheritance
• No plan at all

Who Interest-Only Suits

Buy-to-Let Investors

Interest-only is standard for investment properties:

• Lower costs maximise rental yield
• Interest is tax-deductible against rental income
• Capital growth builds equity
• Sell property to repay (or refinance)

High-Net-Worth Borrowers

Wealthy borrowers might use interest-only to:

• Preserve capital for other investments
• Maintain liquidity
• Offset with linked savings (offset mortgages)
• Tax-efficient wealth structuring

Short-Term Situations

Interest-only can work short-term if you:

• Are waiting for a large sum (inheritance, bonus, property sale)
• Need temporary lower payments
• Plan to convert to repayment soon

Part-and-Part Mortgages

Some borrowers split their mortgage:

Example: £200,000 mortgage

• £150,000 repayment
• £50,000 interest-only

This reduces monthly payments while still building equity on most of the loan. You'll still need to repay the £50,000 interest-only portion at term end.

The Equity Question

Repayment: Automatic Equity Building

Year	Balance Remaining	Equity Built*
0	£250,000	£0
5	£221,000	£29,000
10	£186,000	£64,000
15	£143,000	£107,000
20	£89,000	£161,000
25	£0	£250,000

*Assuming no house price change—actual equity also affected by property value.

Interest-Only: Equity from Growth Only

Year	Balance Remaining	Equity Built
Any	£250,000	Property growth only

If your property value stays flat, you build no equity over 25 years with interest-only.

Converting Between Types

Repayment to Interest-Only

Some lenders allow temporary switches if:

• You face financial hardship
• You meet interest-only lending criteria
• You have a repayment strategy

This isn't always possible—check your mortgage terms.

Interest-Only to Repayment

Converting to repayment is usually straightforward but increases monthly payments. Often done:

• When circumstances improve
• When approaching end of term
• When remortgaging

Current Availability

Residential Mortgages

Interest-only residential mortgages have become rare since the 2008 financial crisis:

• Most require 50%+ deposit
• Strict repayment strategy requirements
• Limited product choice
• Higher rates than repayment

Buy-to-Let Mortgages

Interest-only remains standard for buy-to-let:

• Widely available at normal LTVs
• Property sale accepted as repayment strategy
• Competitive rates
• Most landlords choose this option

Overpaying Interest-Only Mortgages

You can voluntarily overpay an interest-only mortgage to reduce the balance:

Benefits:

• Reduces the amount you'll owe at term end
• Works like a flexible savings account
• Some lenders allow borrowback

Considerations:

• You could invest the difference instead
• Requires discipline
• Check your lender's overpayment terms

See our overpayments explained guide for strategies.

End of Term: What Happens?

Repayment Mortgage

Term ends → mortgage repaid → you own property outright. Nothing more to do.

Interest-Only Mortgage

Term ends → full balance still owed. You must:

1. Repay in full using savings, investments, or other means
2. Sell the property and repay from proceeds
3. Remortgage (if you qualify at that age/circumstances)
4. Switch to repayment for remaining years (higher payments)
5. Retirement interest-only product (interest-only continuing in retirement)

Making Your Decision

Choose Repayment If:

• You're buying your home to live in
• You want automatic equity building
• You prefer certainty about owning your home outright
• You don't have a credible alternative repayment plan
• You're a first-time buyer

Choose Interest-Only If:

• You're a buy-to-let investor
• You have substantial other assets
• You have a credible, funded repayment plan
• You need maximum cash flow flexibility
• You understand and accept the risks

The Bottom Line

For most residential borrowers, repayment mortgages are the sensible choice. You automatically build equity, will own your home outright, and don't need to worry about finding a lump sum later. Interest-only has its place—particularly for investors—but requires discipline, planning, and genuine means to repay.

Summary

Repayment mortgages cost more monthly but less overall, automatically building equity until you own your home. Interest-only costs less monthly but more overall, requires a repayment strategy, and builds no equity from payments. Most residential borrowers should choose repayment; interest-only suits investors and high-net-worth borrowers with clear plans.

Use our overpayment calculator to see how extra payments on either mortgage type could save you money.