Interest Only Or Capital Repayment?

Like all other types of personal borrowing, a mortgage has two parts to it: the amount you borrow (capital) and the interest charged by the lender. There are two main ways you can choose to repay your mortgage - repayment (also known as capital and repayment) or interest-only. 

In this guide, we’ll break down how each repayment method works, the pros and cons of both, and how to decide which is right for you. Whether you're a home mover, a first-time buyer, investing in property, or considering switching from one to the other, you’ll get a clearer idea of what works best for your situation.

How Does a Repayment Mortgage Work?

A repayment mortgage is the more straightforward of the two options. With this method, your monthly repayments cover both the interest charged AND a portion of the original loan amount (the capital). By the time you reach the end of your mortgage term, you’ll have paid off the whole debt and own your property outright.

Each payment you make gradually chips away at the balance. Initially, your payments are mostly interest, but over time, more of each payment goes toward repaying the capital.

This is the most common type of mortgage for residential buyers (home movers, first-time buyers) because it gives a clear path to full ownership and reduces risk over time.

Pros and Cons of a Repayment Mortgage

Repayment mortgages offer stability and peace of mind, but they can also come with higher monthly costs compared to interest-only.

Why They’re Great

• You reduce the loan balance every month and pay less interest overall as the capital reduces

• You'll own your home outright by the end of the term.

• Less risk – you're not relying on a separate repayment plan to repay your mortgage.

• Wider selection of mortgage products and lenders with better interest rates as your loan-to-value (LTV) ratio reduces.

What to Watch Out For

• Higher monthly repayments compared to interest-only.

• Less flexibility if your income fluctuates or is ‘stretched’.

• The capital amount can take a while to reduce, particularly in the first few years.

How Does an Interest-Only Mortgage Work?

An interest-only mortgage is exactly what it says – you only pay the interest part of the loan each month. The loan amount (the capital) stays the same. That means your monthly payments are lower, but you’ll need to repay the full loan at the end of the term.

Because of this, lenders will want to see a solid plan for how you will repay the capital before approving an interest-only mortgage deal. That could be from selling a property, cashing in investments, or using savings.

Interest-only mortgages are often used by landlords for buy-to-let properties as the lower repayments can be more easily covered by rental payments or by someone who has other assets readily available to repay the loan.

Pros and Cons of an Interest-Only Mortgage

This type of mortgage gives more breathing room in the short term but carries greater long-term risk than the repayment alternative.

Why They’re Great

• Lower monthly payments - better monthly cashflow (attractive for landlords)

• If your investment or repayment plan overperforms, the extra capital you get after repaying your mortgage can be used as you wish

• May allow you to borrow more or afford a more expensive property upfront

What to Watch Out For

• You’ll need a solid repayment plan in place, AND make sure it is enough to repay the mortgage loan IN FULL at the end of the term.

• Fewer lenders offer them, particularly for residential buyers.

• Higher deposit and stricter eligibility criteria

• You’ll likely pay back more interest overall, compared with a repayment mortgage, as the capital remains the same throughout the term.

How Do You Repay the Capital with Interest-Only?

When you reach the end of the term on an interest-only mortgage, the full loan amount still needs to be repaid in one go. That’s why lenders insist on a REALISTIC repayment strategy from the start.

Common repayment vehicles include:

• Savings: Cash saved over time in ISAs or high-interest savings accounts

• Investments: Stocks, shares or bonds

• Property sale: Selling the mortgaged home or another property

• Pension lump sum: Using part or all of the tax-free sum you can receive from your pension when you retire

• Business profits or bonuses: If you’re self-employed or in a high-income employment role

• Endowment policies: Older savings policies designed for this purpose (not very common nowadays)

If you don’t have a clear, realistic plan to repay the capital, an interest-only mortgage is likely not the right choice. It’s important to remember that if the money isn’t there when the mortgage term ends, you possibly risk losing your home. 

Can You Switch Between Each Type?

Yes – it’s possible to switch, but it depends on your lender and circumstances.

• Switching from interest-only to repayment: This is often encouraged by lenders as you’re actively reducing your debt. It may mean higher monthly payments, so your affordability will need to be reassessed.

• Switching from repayment to interest-only: This is harder to do. Lenders will want proof of a solid repayment plan and may only allow it in specific circumstances, like temporary financial hardship or converting to a buy-to-let.

Remortgaging is a common way to make the switch, either with your current lender or by moving to a new one offering better, more flexible terms.

Interest-Only or Repayment: Which Is Best?

Ultimately, there’s no right or wrong answer to this question – just what works best for you and your requirements. Here’s how to weigh both options up.

A repayment mortgage is usually best if:

• You want to eventually own your home outright

• You prefer a simple, predictable way to repay the loan

• You have a steady income and can afford the monthly repayments

An interest-only mortgage might suit you if:

• You need lower monthly repayments for now

• You’re investing in property (e.g. buy-to-let)

• You have a clear and dependable repayment plan in place

Still can’t decide? There is a third option known as a part-and-part mortgage, which combines both methods. You repay part of the loan over time and the rest at the end, giving you a balance between lower monthly costs and capital reduction.

Summary: What You Need to Know

• Repayment mortgages are the safest and most common option – your monthly payments clear the debt over time, and you’ll own your home by the end of the term.

• Interest-only mortgages keep costs lower each month, but the full loan remains unpaid until the end. You’ll need a separate plan to repay the balance.

• Switching is possible, but it depends on your lender and circumstances.

• The best option depends on you – your income, your goals, and how comfortable you are with risk.