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Repayment vs interest-only mortgages

When applying for a mortgage, you will typically choose between a repayment mortgage and an interest-only mortgage. The choice significantly affects both your monthly cash flow and your long-term equity.

Repayment mortgages (Capital and Interest)

With a repayment mortgage, your monthly payments cover both the interest charged on the loan and a portion of the original borrowed amount (the principal). Because you are slowly paying off the debt, the mortgage balance decreases over time. If you make all your payments, the mortgage will be completely cleared at the end of the term.

Interest-only mortgages

With an interest-only mortgage, your monthly payments only cover the interest charged by the lender. They do not reduce the original loan amount. Monthly payments are lower, which can improve short-term cash flow, but you will still owe the full borrowed amount at the end of the mortgage term. Buy-to-let mortgages are frequently offered on an interest-only basis, but landlords must have a clear strategy for repaying the capital when the loan matures.

How mortgage payments are estimated

For an interest-only loan, the calculation is straightforward: the annual interest rate is applied to the principal loan amount, and the result is divided by 12 to find the monthly payment.

For a repayment mortgage, the calculation uses an amortisation formula. In the early years of a repayment mortgage, a larger proportion of your monthly payment goes toward interest, because the outstanding balance is high. As the balance decreases over time, an increasing proportion of your payment goes toward clearing the capital.

How interest rates affect payments

Mortgage interest rates can be fixed, variable, or track a base rate. If you have a fixed-rate mortgage, your payments will remain the same during the fixed period. Once that period ends, you will typically move to the lender's standard variable rate (SVR) unless you remortgage to a new deal.

For landlords and property investors, testing how an increase in interest rates would affect monthly payments and overall rental profitability is an important part of risk management. Lenders will also run their own "stress tests" to ensure the rent covers the mortgage even if rates rise.

Why actual lender payments may differ

Calculators provide a mathematically pure estimate, but actual lender quotations may differ slightly. This is because:

• lenders may calculate interest daily, monthly or annually;
• product fees might be added to the loan balance;
• the precise number of days in a year or month can affect daily interest accrual;
• initial payments may cover a slightly longer or shorter period than a standard month.

Use these estimates for planning and comparison, but rely on formal mortgage illustrations from a lender or broker for exact costs. If you need to assess the relationship between the loan and the property value, you can also use our loan-to-value calculator.