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Interest-only and capital repayment are the main mortgage repayment types, but how do they compare and which should you choose? Find out here…
What’s the difference between an interest-only and capital repayment mortgage?
The main difference between an interest-only mortgage and a capital repayment one is the way you repay the debt each month. With interest-only, you are only required to pay the interest, while on capital repayment you would pay a portion of the debt plus interest.
If you were to choose the interest-only repayment type, the amount you have borrowed would not diminish over time, and you would be left with the full debt at the end of the term.
This debt needs to be settled with a repayment vehicle that the lender must approve during the application, another key difference between these two mortgage types.
At the end of a capital repayment mortgage your debt will have cleared and you will own your home outright, without needing a plan to foot a substantial bill.
Is the lending criteria different for interest-only?
The biggest difference in terms of eligibility requirements is that you need to evidence a repayment vehicle if an interest-only mortgage is your preference.
Acceptable repayment vehicles include:
-
Existing endowments or ISAs
-
Pension lump sums
-
Sale of the mortgaged property
-
Sale of another property
-
Sale of other assets
The other main difference between the two mortgage types is that the deposit and minimum income requirements for interest-only are more stringent than capital repayment.
You will need at least 15% deposit compared to 5-10% for capital repayment, and minimum income requirements can range between £25-75k for interest-only.
Which repayment type is better for you?
Interest-only and capital repayment mortgages have their own advantages and disadvantages, and the one you should choose will depend on your circumstances.
The table below shows a head-to-head comparison of the two repayment types and summarises their advantages and disadvantages at a glance.
|
Interest-Only Mortgage |
Capital Repayment Mortgage |
|
Lower monthly payments but borrowers pay more for their mortgage overall |
Higher monthly repayments but diminishing debt means paying less overall |
|
Need a deposit of at least 15% |
Need a deposit of at least 5% |
|
Income requirements typically £25-75k |
No minimum income requirements |
|
Money saved each month can be invested elsewhere, but repayment vehicles can fail |
Less free capital to invest elsewhere but lower risk of being unable to settle mortgage at the end of the agreement |
|
Higher risk of falling into negative equity if property prices were to change |
Lower risk of falling into negative equity |
|
Easier to switch to capital repayment if circumstances change |
More difficult to switch to interest-only as borrowers must meet more stringent criteria |
Compare mortgage deals for free
You can use our free service to compare what kind of deals are currently available for capital repayment mortgages and interest-only agreements. In general, the rates are usually no different for the two types, but there are often fewer deals available on interest-only.
Below you can choose whether to start browsing the latest rates from more than 90 lenders yourself, or have one of our mortgage brokers do the legwork for you:
Compare interest-only and repayment mortgages
How to compare the cost difference
You can use our mortgage repayment calculator below to compare the monthly cost of an interest-only mortgage with that of a capital repayment mortgage.
This tool gives you the option to select ‘interest only’ or ‘repayment’ as the mortgage type so you can see how the results compare across them both:
Comparison calculations
The tables in this section show how the repayments on an interest-only mortgage compare to a capital repayment one, in terms of both the monthly and overall cost.
We have used a 4.5% interest rate and a 25-year term length for example purposes.
Monthly payments
This table shows example calculations that highlight how the monthly repayments on an interest only mortgage compare to capital repayment. Note how the monthly repayments on interest-only are lower because no debt repayments are being made.
|
Mortgage Amount |
Monthly Payment (Interest-Only) |
Monthly Payment (Capital Repayment) |
|
£375 |
£556 |
|
|
£750 |
£1,112 |
|
|
£1,125 |
£1,667 |
|
|
£1,500 |
£2,223 |
|
|
£1,875 |
£2,779 |
Overall payments
This table shows how the overall cost of an interest-only mortgage compares to a capital repayment one of the same amount. Note how you will pay more for an interest-only mortgage overall since the interest payments won’t shrink in line with the capital debt.
|
Mortgage Amount |
Overall cost (Interest-Only) |
Overall Cost (Capital Repayment) |
|
£100k |
£212,500 |
£166,750 |
|
£200k |
£425,000 |
£333,499 |
|
£300k |
£637,500 |
£500,249 |
|
£400k |
£850,000 |
£666,999 |
|
£500k |
£1,062,500 |
£833,749 |
Middle grounds you could consider
If you’re unsure whether to choose an interest-only or capital repayment mortgage, the good news is that there are potential middle grounds between the two that you could consider.
Possible compromises you could explore include:
- Part-and-part mortgages: A part-and-part mortgage is literally a halfway house between capital repayment and interest-only. Only a portion of the mortgage debt is interest-only so borrowers are steadily chipping away at the debt too.
- Optional capital repayments: Some mortgage lenders allow borrowers to make optional capital repayment on an interest-only mortgage up to a certain amount. This option gives you the opportunity to reduce the capital debt as and when.
- Switch to interest-only temporarily: If the reason you want an interest-only mortgage is to save money, some lenders will give you the option to temporarily change a capital repayment mortgage to interest-only for up to six months. This option is exclusively for homeowners with an existing mortgage.
How we can help with your mortgage application
On Teito you can compare interest-only and capital repayment mortgage deals for free and choose the one you want in real time. If you’re struggling to decide which repayment option to choose, our expert mortgage brokers can offer bespoke advice about this.
Here are just some of the reasons people choose us for their mortgage needs:
- You can access the latest rates and deals in seconds
- Our brokers specialise in interest-only and repayment mortgages
- We are 5-star rated on leading review websites
- You can secure an agreement in principle in minutes
Ready to compare deals and take advantage of a free, no-obligation chat with one of our expert mortgage brokers? Get started here.
FAQs
Most buy-to-let landlords opt for interest-only mortgages as it allows them to keep costs to a minimum and free up capital to invest elsewhere, but repayment buy-to-let mortgages are available and there are circumstances where they are essential.
For instance, if you are letting the property to family members, you may need a consumer buy-to-let mortgage, and these are always offered on a repayment basis.
Choosing an Adviser
Selecting a qualified and experienced mortgage adviser is of great importance. To choose a suitable adviser, evaluate their qualifications, experience, and reputation, and ensure they are regulated by the Financial Conduct Authority (FCA).
Read reviews from previous clients and make sure they provide a clear explanation of the products and services they offer, as well as the fees and charges associated with them.