Skip Navigation Links. Mortgage repayment - interest-only vs capital repayment

There are two main ways in which mortgages can be repaid either on an interest-only basis or on a capital repayment basis.

Interest-only mortgages

With an interest-only mortgage you are only required to pay back the amount of interest charged each month on the capital you have borrowed. For residential homeowner mortgages, it is usually necessary to provide evidence of a repayment vehicle, such as an ISA or endowment, with adequate returns to pay off the capital sum at the end of the mortgage.

In recent years, with high house prices, interest-only mortgages have been popular amongst first-time buyers as the only way they can afford to get on the housing ladder. In such cases interest-only mortgages have often been taken out without setting up a repayment vehicle; instead relying on an increase in property value to gain equity before remortgaging to a repayment mortgage.

Interest-only mortgages are considered more risky than repayment mortgages as they rely on either the performance of an investment or a rise in property values to repay or reduce the capital sum.

Capital repayment mortgages

With a repayment mortgage, each month you pay back the interest you owe plus a small amount of the capital you have borrowed. This means that as time goes by you pay off more of the capital each month and are guaranteed to have repaid the total amount borrowed, plus the interest charged, by the end of the mortgage term. For this reason, repayment mortgages for homeowners are considered a safer option.

Buy-to-let mortgages

Buy-to-let mortgages are different to homeowner mortgages, and in most cases a landlord will choose to repay the mortgage on an interest-only basis without a repayment vehicle in place. This is because the rental income generated from the property covers the monthly interest payments, and most landlords invest in buy-to-let property as a medium to long term investment; therefore the plan is usually to sell the property in the future at a profit, as a result of house price rises, and repay the capital sum at the same time.