What Is a Repayment Mortgage?

What is a repayment mortgage?

A capital repayment mortgage is when your monthly payments go towards paying off the amount you’ve borrowed (the capital) and some of the interest too. As long as you make all your payments throughout the term of the loan, your mortgage will be fully repaid by the end.

Repayment mortgages are the most common type of mortgage. If you’re buying a property to live in (rather than buy-to-let) then you’ll probably always take out a repayment mortgage.

How does a repayment mortgage work?

You might hear the term ‘front-loaded interest’ when you take out a repayment mortgage. This means that you’ll be paying off more interest from the outset and less of the capital initially. 

You might be surprised by how much of your payments are going towards just interest at the start of your mortgage. But it’s not a reason to be disheartened. As time goes on, you’ll continue to chip away at more of what you owe and bring your balance right down. 

Your monthly payments are higher than they would be with an interest-only mortgage. That’s because your monthly repayments are paying BOTH interest and capital, whereas interest-only mortgage repayments ‘only’ contain the interest element and a separate repayment vehicle is needed for the capital amount.  

Work out what your repayments might look like with our Mortgage Repayment Calculator.

What are the types of repayment mortgage?

Along with choosing how you pay back your mortgage, you’ll also need to consider the interest type. There’s a few choices, and they can all affect your mortgage differently.

• Fixed. A fixed rate means the amount of interest you’ll pay won’t change for a fixed amount of time. Typically, this is between two and five years. When your fixed rate deal ends, your interest rate will switch to your mortgage lender’s ‘standard variable rate’ (SVR). 

• Standard Variable Rate (SVR). A mortgage lender’s ‘standard’ rate with no discounts attached. The SVR is the rate used once your current mortgage deal comes to an end and is usually the highest rate across the lender’s product range. Not one you want to stay on for too long.

• Tracker. A tracker rate is a variable interest rate that tracks another interest rate, typically the Bank of England's base rate, for a set period of time. So, the repayments on a tracker rate mortgage can rise and fall in line with the Bank of England’s base rate.

• Discount. A type of variable rate, discount-rate mortgages have a fixed interest rate set lower than your lender’s SVR for a period of time. Essentially a ‘discounted’ rate. 

• Capped. Capped rate mortgages are a form of Variable Rate mortgage. However, they have an upper limit - or cap - for how much the interest rate can increase. They’re fairly rare these days.

What’s the difference between repayment and interest-only mortgages?

Interest-only mortgages are just that - you only pay back the interest on your mortgage, and not the actual loan amount. At the end of your mortgage term, you’ll need to pay the whole loan back in one go, usually by selling the property or using other investments.

Interest-only mortgages are popular with buy-to-let investors as the monthly payments are a lot cheaper. They’re also quite risky, as you’re relying on property prices staying high. 

While an interest-only mortgage might seem tempting for the lower monthly payments, unless you’re paying into an investment each month to eventually pay off the loan, you could be stuck with a huge balance that you can’t repay. 

You’ll also pay more in the long run with an interest-only mortgage because you’re paying interest on the entire loan every month. With a repayment mortgage, you’re reducing the size of the loan, so the interest goes down as time goes on.

Of the two types of repayment methods, capital repayment is generally regarded as being the way to go for residential property purchases, although there have been signs over recent years that interest-only could be ready to make a comeback.

Can I change from repayment to interest-only?

Yes, you can change your mortgage from repayment to interest-only. Depending on your situation at the time, you can apply to remortgage onto an interest-only deal. You’ll need to check when your current deal ends if you’re on a fixed rate, as you could be hit with big fees for changing your mortgage. 

If your financial situation has changed temporarily and you’re struggling to keep up with your mortgage payments, you can ask your lender to switch you to interest-only temporarily. This will bring your payments down for a short time while you find your feet. All lenders are different though, so it’s best to talk to them as soon as possible if you’re considering it.