What Is a Repayment Mortgage?
A repayment mortgage, sometimes called a capital and interest mortgage, is the most common type of mortgage in the UK. Each monthly payment you make goes towards both the interest charged on the loan and reducing the capital balance.
Over the course of the mortgage term, typically 25 to 35 years, you gradually pay off the entire debt. By the end of the term, provided you've made all your payments, you own your home outright with no remaining mortgage balance.
The vast majority of residential mortgages in the UK are on a repayment basis. Lenders generally prefer repayment mortgages because they carry less risk, and they're the default recommendation for most homeowners.
How Repayment Mortgages Work
In the early years of a repayment mortgage, a large proportion of each monthly payment goes towards interest, with only a small amount reducing the capital. As the years go by and the outstanding balance decreases, the split shifts so that more goes towards capital and less towards interest.
This is why the total amount of interest you pay over the life of a mortgage can seem surprisingly high. On a £200,000 mortgage at 5% over 25 years, you could pay more than £140,000 in interest on top of the £200,000 borrowed.
However, the advantage is certainty. As long as you keep up your payments, the mortgage will be fully repaid by the end of the agreed term. There's no need for a separate repayment vehicle or investment plan.
Advantages of Repayment Mortgages
The biggest advantage is that you're guaranteed to own your home outright at the end of the term, provided you make all your payments. There's no risk of reaching the end of the mortgage and still owing money, as there can be with an interest-only mortgage.
Repayment mortgages are straightforward and easy to understand. You know that each payment is reducing your debt, and you can see your loan balance decreasing over time. This provides peace of mind that you're making progress towards being mortgage-free.
Lenders offer the widest range of products for repayment mortgages, which means more competition and potentially better rates. You'll also find it easier to remortgage, as lenders are more willing to offer competitive deals when the loan is on a repayment basis.
Things to Consider
Monthly payments on a repayment mortgage are higher than on an interest-only mortgage for the same loan amount and term. This is because you're paying off the capital as well as the interest each month.
If your financial situation changes and you struggle to meet the higher payments, you may need to extend your mortgage term to reduce monthly costs. While this lowers your payments, it means you'll pay more interest overall and take longer to become mortgage-free.
Overpaying on a repayment mortgage, even by small amounts, can make a significant difference. Extra payments go directly towards reducing the capital, which in turn reduces the interest charged in future months. Many lenders allow overpayments of up to 10% of the outstanding balance each year without penalty.
Important: Your home may be repossessed if you do not keep up repayments on your mortgage. There will be a fee for mortgage advice. The actual rate available will depend on your circumstances. Think carefully before securing other debts against your home.