Although repayment mortgages are the most popular, there are actually three ways that a mortgage can be setup.
This is known as the “repayment method”, your choices are:
You need to have made your mind up before you apply for a new mortgage as the repayment method forms part of the application form. Also, not all lenders offer all three options.
Read on to discover how each one works and who they might appeal to.
mortgage repayment methods
Repayment mortgage
Also known as a capital and interest mortgage.
With a repayment mortgage you slowly repay the amount borrowed (the capital) plus the interest over the mortgage term.
Each month you pay interest and some of the capital off, so the amount you owe gradually reduces. This will be reflected in the annual mortgage statement that gets sent to you each year.
How do they work?
The repayment of your mortgage is calculated over the term you have chosen (ie 25 years).
The lender works out how much interest and how much capital you need to pay to keep to the agreed term and this is combined into one monthly payment. At the start you won’t be paying much capital off but after a few years this changes so that more of the monthly payment goes towards paying back the debt.
Your monthly payment stays the same, unless interest rates change.
How popular are they?
Repayment mortgages are the go-to choice for the majority of people applying for residential mortgages.
At the end of 2022, approximately 7,500,000 residential mortgages were on a full repayment basis. This equates to around 88% of all outstanding mortgages.
While buy to let property investors generally prefer interest only.
How easy are they to get?
Very easy. A capital and interest repayment method is the preferred option for lenders, particularly for standard residential mortgages.
What happens at the end of the mortgage?
Your mortgage repayments are carefully worked out by the lender over the mortgage term.
With the last scheduled payment your mortgage will be completely paid off.
capital & interest mortgages
Can I change my interest-only mortgage to repayment?
Switching from an interest-only mortgage to a repayment mortgage is fairly common. The majority of mortgage lenders accept and even prefer this switch, so it’s more of a win-win situation.
However, you will need to demonstrate that the higher monthly repayments are affordable.
Will the monthly repayments reduce over time?
Unfortunately not.
The lender works out an average payment over the whole mortgage term. So although in the latter years you will owe a lot less, your payments remain the same throughout.
Can you get a repayment buy to let mortgage?
Yes, buy to let mortgages can be set up as full repayment or interest-only.
Most lenders are fine if you choose the interest only option. As buy to let mortgages are not regulated there’s more flexibility for the lender.
mortgage repayment methods
Interest only mortgage
With an interest-only mortgage the lender is only expecting you to pay the interest amount each month.
The monthly payments are therefore cheaper than the equivalent repayment mortgage. The downside is that the debt does not reduce, so at the end of the term the lender will be asking for all of the money to be repaid.
How do they work?
With an interest only mortgage you do not have to make any repayments of capital with the monthly payment. The lender is only expecting you to pay the interest, not any of the original debt.
So as each year of the mortgage term passes your mortgage balance stays the same.
How popular are they?
Interest-only mortgages are a popular option, mostly with buy to let investors and borrowers who are more experienced.
At the end of 2022, 702,000 residential mortgages were on a pure interest-only basis, not including combination loans. This equates to around 9% of all outstanding mortgages. These figures reduce each year.
How easy are they to get?
It’s not particularly easy to get a pure interest only option for a residential mortgage. This is mainly due to a tightening of mortgage regulation over the years.
Endowment mortgages and pension mortgages were based on the interest-only repayment method. Many people were sold these mortgages without being fully aware of the possible downsides. They are no longer available.
The lenders that do offer them often need a higher deposit/equity amount when compared to a repayment loan.
You would need to explain to a lender why you need interest-only, and how you intend on paying them back. There is no guarantee that they will accept this request, your broker will be able to help you with this.
There are a number of lenders that do not offer interest only mortgages at all. They need every new mortgage to be set up on a full repayment basis.
What happens at the end of the mortgage?
When the mortgage term expires the original debt remains outstanding.
The lender will require you to pay this off completely, in one lump sum payment. Unless you have requested a term extension, no extra time will be given.
interest only mortgages
What happens when my interest only mortgage ends?
If you’re coming to the end of your interest-only mortgage, you need to start thinking about how you’re going to repay it. Your lender will write to you before it is due to finish to remind you and explain the process.
Basically, you need to give them a lump sum to completely pay off the mortgage balance.
Can you add life insurance to your mortgage?
Mortgages and life insurance policies are not provided as a combined product. A mortgage is a mortgage, and a life policy is a life policy.
While you can’t add life insurance to your mortgage, you can take out a separate life policy that protects it. Level term insurance is a popular choice for an interest only mortgage.
mortgage repayment methods
Part and part mortgage
A part and part mortgage is a combination of interest-only and repayment. Cost wise, it sits between the two.
This option is not widely promoted but most lenders should support it, ask your mortgage broker for their guidance.
With a part and part mortgage you will be splitting the repayment of your debt between repayment (capital & interest) and interest only.
REPAYMENT + INTEREST ONLY = PART & PART
With the repayment portion the debt will gradually reduce as normal but the interest only part stays the same. When the mortgage ends, there will still be a debt to pay off.
How do they work?
When applying for a mortgage you will ask the lender to split the loan into 2 parts:
- The repayment part
- The interest only part
There’s no definitive way to how these are set up or proportioned. It will be down to what suits you best, along with the lender’s agreement.
How popular are they?
Part and part mortgages are not very popular, mainly because very few people are aware of them. They do make the mortgage arrangement a bit more complicated, but for many people it is a lower risk way of reducing their monthly payments.
At the end of 2022, 222,000 residential mortgages were on a part interest-only, part repayment basis. This equates to around 3% of all outstanding mortgages.
How easy are they to get?
Quite a few lenders will offer part and part as a repayment option. But, like the interest-only option, you will still need to convince them why you want an interest only component. And then how this will be paid back.
What happens at the end of the mortgage?
At the end of the mortgage term the portion of the loan setup as interest only will still be owed to the lender.
You will need to repay this in one go, by way of a lump sum payment.
part and part mortgages
What happens at the end of the mortgage?
The amount of money that you borrowed on an interest-only basis will still be owed.
The lender will be expecting you to send them a lump sum to pay this in full.
Who offers part and part mortgages?
Not every lender is happy offering a part and part combination mortgage.
It’s the interest-only bit that they don’t like.
Luckily there are a good number of well known lenders offering them, plus lots of specialist lenders. Ask your broker for details.
Part and Part Mortgage Calculator
This simple calculator will quickly work out the monthly repayments for a part interest-only, part repayment mortgage.
Who needs a part and part mortgage?
These mortgages are cheaper than full repayment, and more expensive than pure interest-only.
Many people choose them as it makes the monthly payments more affordable, while still enabling some of the mortgage debt to be repaid.
How do part repayment and part interest only mortgages work?
Part and part mortgages can be a good way to keep your monthly repayments down while still gradually reducing the mortgage balance. We take a look at what a part and part mortgage is, how it works and whether it could be the right option for you.
mortgage repayment methods
The mortgage term
How does the choice of mortgage term affect a mortgage?
The traditional term for repayment of a UK mortgage is 25 years. Longer and shorter terms have been available but this seems to be a length of time that borrowers are comfortable with.
Recent research has discovered that half of all first time buyers are now choosing a mortgage term of 30 years, or more.
Why would this be?
With a repayment mortgage you are repaying the amount borrowed over a set number of years. If you increase the mortgage term, then you have more time to repay the debt, so the amount you pay each month goes down.
Borrowers are choosing marathon mortgages, with extended terms, to lower the monthly cost of a mortgage.
How popular is this?
Many borrowers are now either choosing a longer mortgage term or are extending the term of an existing mortgage. With the high cost of property and the effect of higher interest rates, paying a mortgage over a longer term makes it more affordable.
Half of all first-time buyers in the UK, and over a quarter of home movers who took out a mortgage in the third quarter of 2022 opted for a term of more than 30 years. Read more.
How easy is it to get?
Lenders are realising that mortgage borrowers are needing more time to repay their mortgages, and as a nation we are working and retiring later than in previous years.
What happens if you have a longer term?
The term of a mortgage will directly affect the monthly cost of a repayment mortgage.
However, if you were to take out an interest only mortgage, then the term will have no direct effect (at all) on your monthly payments.
If you take a very simple example of a £250,000 mortgage. It would cost a lot more each month to repay this back over 20 years than it would to pay it back over 30 years. This is because you are compressing all of the debt repayment into a shorter period.
The downside to having a longer mortgage term is that the mortgage overall will be more expensive. This is simply because your debt is taking longer to be repaid, and lenders charge their interest right up until the debt is finally settled.
So you will benefit initially from lower monthly payments but a £250,000 mortgage will cost you more over 30 years than it would over 20 years. All because of the extra interest charges.
You will find more useful information in our article: What’s the longest mortgage term you can get?
mortgage term
In summary
Whatever repayment method you choose, it will affect your mortgage for many years to come.
While an interest-only mortgage, with its lower repayments, is very enticing, all of the money you borrowed still needs to be paid back.
Always get advice on the best way to set up your mortgage. A whole of market mortgage broker is qualified to give you impartial advice, and they deal with over 100 lenders.
Call us on 0330 030 5050 to be put in touch with a broker.
