Savings & Investing

Interest Only vs Repayment Mortgage UK: Complete Comparison

Comprehensive comparison of interest only vs repayment mortgages in the UK. Monthly payments, total costs, eligibility, and which mortgage type suits your situation.

By PocketWise · · 5 min read

Savings and investment information is for educational purposes only. The value of investments can go down as well as up. Cash savings up to £85,000 per person per institution are protected by the FSCS.

The choice between interest only and repayment mortgage fundamentally changes how much you pay each month and whether you’ll own your home outright. Here’s everything you need to know.

Quick Comparison

Feature Repayment Mortgage Interest Only Mortgage
Monthly payment Higher Lower
What you pay Interest + capital Interest only
At end of term Own home outright Full debt remains
Total interest paid Less over term More over term
Risk level Lower Higher
Availability Widely available Strict criteria
Equity building Yes, from day one No (only property value changes)

How Each Mortgage Works

Repayment Mortgage

Feature Details
Monthly payment Interest + part of loan
Balance Reduces each month
End of term £0 owed, own home outright
Early repayment Faster if overpay

How Payments Change Over Time

Year Interest Portion Capital Portion Balance
1 High Low Slight reduction
10 Medium Medium Significant reduction
20 Low High Approaching zero
25 Tiny Maximum £0

Interest Only Mortgage

Feature Details
Monthly payment Interest only
Balance Stays the same
End of term Full original loan owed
Repayment Need separate plan

Payment Structure

Element Interest Only Repayment
Pay interest Yes Yes
Pay principal No (separately) Yes (together)
Build equity through payments No Yes

Payment Comparison

£250,000 Mortgage, 25 Years, 5% Interest

Type Monthly Payment Total Paid Interest Paid
Repayment £1,461 £438,300 £188,300
Interest Only £1,042 £312,600 + £250,000 repayment £312,600
Difference £419/month less – £124,300 more

Monthly Savings with Interest Only

Loan Amount Repayment Interest Only Monthly Difference
£150,000 £877 £625 £252
£200,000 £1,169 £833 £336
£250,000 £1,461 £1,042 £419
£300,000 £1,753 £1,250 £503
£400,000 £2,338 £1,667 £671

But remember: With interest only, you still owe the full amount at the end.

Total Cost Analysis

True Cost Over 25 Years

Element Repayment Interest Only
Original loan £250,000 £250,000
Total interest £188,300 £312,600
Loan still owed at end £0 £250,000
Total cost £438,300 £562,600
Difference – £124,300 more

What Interest Only Savers Must Do

The £419/month saving must be invested to build the £250,000 repayment fund:

Monthly Investment Growth Rate After 25 Years
£419 0% £125,700 (shortfall)
£419 4% £233,400 (shortfall)
£419 6% £290,400 (covers it)
£419 8% £362,600 (surplus)

Risk: Investment returns aren’t guaranteed you might not reach £250,000.

Eligibility Comparison

Repayment Mortgage

Requirement Details
Deposit Typically 5-25%
Income Affordable monthly payment
Credit history Varies by lender
Availability Most lenders, most borrowers

Interest Only Mortgage

Requirement Details
Deposit Typically 25-50%
Income Often higher thresholds
Loan-to-value Usually max 75%
Repayment strategy Must demonstrate
Property value Often minimum ~£300,000+
Availability Limited lenders, strict criteria

Acceptable Repayment Strategies

Strategy Details
Investments ISA, investment portfolio
Pension lump sum 25% tax-free cash
Property sale Sell this or another property
Endowment Legacy policies (rare now)
Bonus/income Very high earners only
Sale and downsize For older borrowers

Not acceptable: “Hope property value rises.”

Pros and Cons

Repayment Mortgage Pros

Pro Details
Build equity Own more each month
Certainty Know you’ll own outright
Lower total cost Less interest long-term
Automatic No separate investment needed
Lower risk Clear path to ownership

Repayment Mortgage Cons

Con Details
Higher monthly payment Tighter cash flow
Less flexibility Larger committed expense
Equity tied up Money locked in property

Interest Only Pros

Pro Details
Lower payments More monthly cash flow
Investment potential Invest difference for growth
Cash flexibility Money available elsewhere
Tax-efficient For buy-to-let (interest deductible)

Interest Only Cons

Con Details
Full debt remains Must repay somehow
No automatic equity Don’t build ownership
Higher total cost More interest over time
Investment risk Might not hit target
Harder to get Strict criteria
Time bomb End of term arrives

Who Should Choose Each

Repayment Mortgage Best For

Situation Why
First-time buyers Start building equity
Want certainty Know you’ll own it
Not investment confident No separate strategy needed
Standard employment Regular income
Risk-averse No end-of-term stress
Long-term home Building towards ownership

Interest Only Potentially Suits

Situation Why
Buy-to-let landlords Lower costs, interest tax-deductible
High earners Can genuinely invest the difference
Near retirement Plan to downsize/use pension
Wealthy with assets Have repayment strategy
Short-term only Selling within years

Warning: Interest only needs discipline and a genuine plan.

The Buy-to-Let Exception

Why Interest Only for Landlords

Factor Details
Lower payments Better cash flow
Interest deductible Tax-efficient (restricted)
Rent covers costs Tenant pays interest
Sale at end Common exit strategy
Property often appreciates Covers (or exceeds) loan

Example BTL Interest Only

Element Value
Property value £200,000
Mortgage (75% LTV) £150,000
Interest only payment (5%) £625/month
Rent received £900/month
Cash flow +£275/month

At end: Sell property (hopefully appreciated), repay mortgage, keep profit.

Part Repayment, Part Interest Only

Hybrid Option

Some lenders offer split mortgages:

Portion Type Monthly
£150,000 Repayment £877
£100,000 Interest only £417
Total – £1,294

vs full repayment on £250,000: £1,461

Benefits of Split

Benefit Details
Lower payments Than full repayment
Some equity built Through repayment portion
Smaller end debt Only interest portion owed
Flexibility Balance risk and cost

Switch Options

Repayment to Interest Only

When Possible Considerations
Financial difficulty Temporary reduction
Cash flow need Lower payments
Lender agreement Must qualify

Interest Only to Repayment

When Common Considerations
Before term ends Build equity
Circumstances improve Pay down loan
Repayment strategy fails Safety net
Remortgage New deal changes type

End of Term: Interest Only Reality

What Happens at Term End

Scenario Outcome
Have funds Pay off mortgage
Sell property Use proceeds to repay
Downsize Buy smaller, clear debt
Remortgage If equity and qualify
Can’t repay Potential repossession

Planning Ahead

Action When
Review repayment strategy Annually
Check investment performance Regularly
Contact lender 10+ years before end
Professional advice Well before term ends

Making the Decision

Choose Repayment If:

  • You want certainty of owning home
  • You don’t want investment responsibility
  • Monthly payment is affordable
  • You’re risk-averse
  • This is your main home

Consider Interest Only If:

  • You have a solid repayment strategy
  • You’re a buy-to-let investor
  • You’re high earner who will invest difference
  • You plan to sell/downsize
  • You have large pension lump sum coming
  • You can meet strict lender criteria

Summary

Factor Repayment Interest Only
Monthly cost Higher Lower
Total cost Lower Higher
End of term Own home Owe full amount
Risk Lower Higher
Availability Easy Strict
Best for Most people Specific situations

Key points:

  • Repayment is safer and suits most homeowners
  • Interest only has lower payments but debt remains
  • Interest only requires genuine repayment strategy
  • Buy-to-let commonly uses interest only
  • Total cost higher with interest only
  • Part and part offers middle ground
  • Review your situation before choosing

For more guidance:

Sources

  1. FCA — Mortgages
  2. MoneyHelper — Mortgage types
  3. UK Finance — Mortgages