Repayment methods

sarahgibson • 28 Apr 2021

The two most common ways of repaying your mortgage are capital repayment and interest only.

Capital repayment

On a repayment mortgage, your monthly payments will partly go towards repaying the interest accrued on the money you’ve borrowed and partly towards repaying the capital sum (i.e. the amount you borrowed). The benefit of capital repayment is that you’ll be able to see your outstanding mortgage reducing each year (albeit very slowly in the early years), and you are also guaranteed that your debt will be repaid at the end of the mortgage term, as long as you keep up your payments. On a capital repayment mortgage, the shorter the term you pay your mortgage over the bigger your monthly payments will be. By having a longer term, you may benefit from a lower monthly payment, but you will also pay more interest to the lender over the mortgage term. You will need to think about how soon you want to be `mortgage free’ and weigh this up against a mortgage term that makes your monthly repayments affordable.

Capital repayment is the most common way of repaying your mortgage.

Interest only

For an interest only mortgage, your monthly payments will only cover the interest on your mortgage balance. The capital you owe (i.e. the amount you borrowed) will not go down and you will need to repay this in full at the end of your mortgage term. This means you will need to make a separate investment or combination of investments to generate the capital required, and you will also need to prove that you can afford to do this. You should bear in mind that the value of investments can go down as well as up and you may not get back the original amount invested. For an interest only mortgage, the lender will need to see your plan for repaying the loan when the interest only period ends. If you fail to generate enough to repay your mortgage by the end of the mortgage term, you may be forced to sell your property.

With an interest only mortgage, you must be able to demonstrate how you will repay the capital sum at the end of the term.