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Interest only vs repayment mortgages

Written By:
Myles Robinson - Expert Finance Advisor

Posted: Feb 6, 2023

Interest only vs repayment mortgages – Which is best, and what should you choose?

It is a big step to commit to a mortgage. Choosing between a capital repayment or an interest-only mortgage can be difficult. Your circumstances will determine which option you choose.

We’ll walk you through each and show you how to use our interest-only mortgage calculator to calculate your monthly payments.

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What is the difference between a capital repayment mortgage and an interest-only loan?

An interest-only mortgage allows you to pay only the capital interest each month, until you have to repay the full capital owed.

Capital repayment mortgages have a monthly repayment that is made from a combination of capital and interest. This means that your total debt decreases over the loan term, so there is no capital to pay at the close.

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Which type has the best and worst benefits?

An interest-only mortgage has the primary advantage of lower monthly repayments. You are only paying interest and not towards the capital. This is useful if you have a plan for paying off the capital over the long term, such as a purchase-to-let or a plan for downsizing in retirement and using the proceeds to repay the original mortgage.

Lower monthly payments can help you budget better, but remember that you will still need a repayment mechanism. This could include investing in savings or making investments along with your mortgage.

Although monthly payments for a capital repayment mortgage will be higher than those of a regular mortgage, they can be reduced as you go. This reduces the total cost of the mortgage over the life of the loan and at the end of the term.

Repayment mortgages also eliminate any risks that come with your repayment plan.

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Is it better to have capital repayment or interest-only?

While an interest-only mortgage can be more costly overall, it can still be a good option in certain situations.

  • A buy-to-let investment where you want to keep your monthly payments low and have the backing of a solid portfolio of properties as a repayment strategy.
  • If you are looking to downsize when you retire, you can use the proceeds from the sale of your home to repay the loan.
  • A retirement-interest-only mortgage where the capital is paid off at your death and the property is sold.
  • If you expect a lump sum in the future, e.g. Another property sale or inheritance that provides a secure repayment option.
  • Your income may be low, but it is expected to rise. Interest-only mortgages allow you to borrow more and have the option to change to repayment if your income increases.
  • It can be used as a temporary measure for property restoration, renovations, or establishing a new business.

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Compare your monthly repayments.

When deciding between an interest-only or repayment mortgage, one of the most important questions is how much it will be. Consider the monthly repayments as well as the total amount due.

We can help you compare completely free of charge below:

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How a mortgage broker can help determine which option is right for you

Choosing between an interest-only or repayment mortgage can be challenging. This is especially true when many options appear to straddle both. A mortgage broker can help you assess your unique situation and determine your best mortgage.

Your broker will use their market knowledge to help you find the best interest rate mortgage lenders once you are satisfied with your decision. Having someone familiar with the market negotiate for you can be a time-saver.

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Is it possible to switch from interest-only and repayment to interest-only?

This is the simple answer. It can be a good move, as it can reduce the total cost of your loan.

If you can start repaying the capital and the interest, this will also help lower the overall cost. As people progress in their careers, earn more money, or find it more affordable, switching from interest-only to repay is common.

Switching to a new lender will significantly increase your monthly mortgage payments.

Lenders will want you to make sure you can afford this extra cost.

There are two options: stay with the same lender, get a different deal or switch to an entirely new lender and remortgage. A broker can help you decide on the best course.

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Is it possible to switch from interest-only repayment to repayment?

Yes, you can switch to interest-only if your monthly mortgage payments are too high. You must have a plan.

Is it possible to get an interest-only mortgage even if you have bad credit?

Yes, it’s possible. Many people fear that bad credit history could prevent them from getting a mortgage. But bad credit does not have to be a problem. Lenders understand that credit problems can occur for many reasons so that they will have a more comprehensive view of your financial situation.

The key is to have a realistic idea of where you stand, so send an enquiry to arrange a no-obligation, free chat with an advisor. We have vetted all brokers that we work with. We’ll match you with someone with the most relevant experience, contacts, and knowledge for your situation.

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What happens if my interest-only mortgage is not paid off?

If the interest-only mortgage term expires and you can’t repay the capital, your property could be taken away. You may also have to pay the debt out of other assets if the property’s value isn’t sufficient to cover the debt.

You may have other options, such as remortgaging or extending the term.

However, these options are not guaranteed. If you are concerned that you may not be able to pay, talk to your lender immediately.

Is it better not to pay more for an interest-only mortgage than for a repayment one?

A capital repayment mortgage is better if you can pay more than your mortgage.

Overpaying on a repayment mortgage will reduce your overall debt and increase your equity share. However, your future interest payments will be reduced with an interest-only mortgage.

Unless you have agreed with your lender, you can pay lump sums or restructure your mortgage.

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