What is a Repayment Mortgage?
Repayment mortgages are the most common type of mortgage for residential properties in the UK. With a repayment mortgage, your monthly payments cover both the interest on the loan and a portion of the capital, or the amount borrowed.
Over the typical 25-year term, your debt gradually decreases as you repay the capital. By the end of the term, the entire loan will be repaid, and you will own your property outright.
The monthly repayments are made up of two elements:
A repayment mortgage consists of two parts:
- The first part repays the amount you have borrowed (the capital).
- The second part covers the interest charged by the lender.
The main advantage of a repayment mortgage is that, as long as you keep up with the payments, you are guaranteed to own your home outright at the end of the term.
While the monthly payments for a repayment mortgage are typically higher than those for an interest-only mortgage—since you are paying off both the capital and the interest—it usually costs less overall in the long term than an interest-only mortgage.
How does a Repayment Mortgage Work?
With a repayment mortgage, your monthly payments are divided between repaying the capital (the amount you borrowed) and covering the interest on the loan.
Initially, a larger portion of your payment goes towards the interest, with a smaller portion allocated to the capital. As the mortgage progresses, more of your monthly payment is directed towards reducing the capital, and less towards the interest. This shift occurs because the interest is calculated on the remaining loan balance.
As the capital decreases, so does the interest charged, meaning that over time, your payments become more focused on repaying the capital, although the total monthly payment amount typically remains the same throughout the mortgage term.
Types of Repayment Mortgage
There are various types of repayment mortgages available, so it's important to compare the deals on offer to find the one that best fits your needs and financial situation. By reviewing different rates, terms, and features, you can ensure you choose the mortgage that aligns with your goals.
The two main types of repayment mortgage are:
Fixed-rate mortgages – With a fixed-rate mortgage, the interest rate is locked in for a specific period, typically between two and five years. This provides the security of knowing exactly what your repayments will be during that time. However, if interest rates fall, you won’t benefit from the lower rates unless you remortgage to a new deal.
Variable-rate mortgages – A variable-rate mortgage means the interest rate can fluctuate over time, which means your monthly payments may increase or decrease. There are different types of variable-rate mortgages, including tracker mortgages and discount rate mortgages:
- Tracker mortgages follow the Bank of England base rate, so if it rises, your mortgage payments will rise as well.
- Discount rate mortgages offer a set discount off the lender’s standard variable rate (SVR) for a specific period. After the discount period ends, the interest rate usually reverts to the lender’s SVR.
Repayment vs Interest Only Mortgages
The key difference between a repayment mortgage and an interest-only mortgage is how you repay the loan. With a repayment mortgage, your monthly payments cover both the interest and the capital, ensuring that by the end of the mortgage term, you will own your home outright. In contrast, with an interest-only mortgage, you only pay the interest each month, and will need to find a separate way to repay the capital when the term ends.
Monthly repayments on an interest-only mortgage are typically lower than those on a repayment mortgage because you're only paying the interest. However, over the long term, an interest-only mortgage will usually cost more overall than a repayment mortgage.
It's important to remember that with an interest-only mortgage, you’ll need to have a plan in place to repay the capital at the end of the term. This could involve investment growth, selling the property, or securing another loan.
If you're uncertain about which mortgage type is best for you, consulting a mortgage advisor is a good idea. They can help you compare different deals and find the most suitable option for your financial circumstances.
Advantages of a Repayment Mortgage
The main advantage of a repayment mortgage is that, as long as you keep up with the monthly repayments, you are guaranteed to own your home outright at the end of the mortgage term.
With a repayment mortgage, you have the peace of mind that your home will be fully yours, and you won’t need to find a lump sum to repay the capital at the end of the term. Repayment mortgages also tend to have lower overall interest costs compared to interest-only mortgages, which can save you money in the long run.
While your monthly payments are typically higher than with an interest-only mortgage, this means you will pay off your mortgage faster, steadily reducing your debt over time.
Disadvantages of a Repayment Mortgage
The main disadvantage of a repayment mortgage is that your monthly payments are generally higher compared to an interest-only mortgage.
For Buy to Let mortgages, the higher payments on a repayment mortgage mean you would need to find a property with a rental income sufficient to cover the repayments, which could limit your property options. This is one reason many buy-to-let investors prefer interest-only mortgages, as the lower monthly payments allow for more flexibility in property choice while relying on future property value growth to repay the capital.