Interest Only vs Repayment Mortgage: Which is Right for You?

Choosing between an interest only and a repayment mortgage is one of the most important decisions you will make when arranging a mortgage. Each has distinct advantages and disadvantages, and the right choice depends on your income, financial goals, risk tolerance, and long-term plans. This guide provides a thorough comparison with worked examples so you can make an informed decision.

For a comprehensive overview of how interest only mortgages work, read our complete guide to interest only mortgages.

What is the difference between interest only and repayment mortgages?

With a repayment mortgage, your monthly payments cover both interest and capital so the debt is cleared by the end of the term; with interest only, you pay just the interest each month and must repay the full loan as a lump sum at the end. With a repayment mortgage (also called a capital repayment mortgage), your monthly payment covers both the interest on the loan and a portion of the capital. Over the full term, the balance reduces to zero — at the end, you own the property outright with no mortgage debt.

With an interest only mortgage, your monthly payment covers only the interest. The capital balance remains unchanged throughout the term. At the end, you must repay the full original loan amount in a single lump sum. You need a separate plan — a repayment vehicle — to accumulate those funds.

How much cheaper is interest only per month? A worked example

On a £300,000 mortgage at 4.5%, interest only costs £1,125 per month compared to £1,668 on repayment — a saving of £543 per month, but you still owe the full £300,000 at the end. Here is a detailed comparison over a 25-year term:

The interest only mortgage saves £543 per month in lower payments. Over 25 years, that is £162,900 in freed-up cash flow. However, the interest only borrower still owes £300,000 at the end of the term. If they had invested the £543 monthly saving and achieved consistent returns, they may have more than enough to repay the capital — but that is not guaranteed.

Which costs more overall — interest only or repayment?

Interest only costs more in total interest — £337,500 versus £200,400 on repayment for a £300,000 mortgage at 4.5% — because you pay interest on the full balance for the entire term. However, looking only at interest paid can also be misleading. That £137,100 difference needs to be weighed against what the interest only borrower does with the monthly savings.

The reason is simple: on a repayment mortgage, the capital balance decreases each month, so you pay interest on a progressively smaller sum. On interest only, you pay interest on the full £300,000 for the entire 25 years.

However, the interest only borrower has had £543 extra per month to deploy elsewhere. If those funds are invested wisely, the returns could more than compensate for the higher interest cost. This is the core argument for interest only — but it relies on investment performance, which is never guaranteed.

Who should choose interest only, and who should choose repayment?

Interest Only May Suit You If...

• You are a higher earner (typically £75,000+ household income) with the discipline and financial knowledge to invest the monthly savings effectively
• You are a buy-to-let investor who wants to maximise rental yield and cash flow from your properties
• You have a clear, credible repayment vehicle already in place or in progress (ISAs, pension, investments)
• You have irregular income (e.g. self-employed, bonus-heavy) and prefer lower fixed monthly commitments
• You are approaching retirement with substantial assets and want to minimise monthly outgoings

Repayment May Suit You If...

• You want the certainty of knowing your mortgage will be fully repaid at the end of the term
• You prefer not to take on the investment risk associated with a repayment vehicle
• You want to build equity in your property with every payment, not just through price growth
• You do not meet the income or equity thresholds for residential interest only (typically £75,000+ income and 50% LTV maximum)
• You value the simplicity of a single arrangement where the mortgage is paid off automatically over time

What is a part and part mortgage, and is it a good compromise?

A part and part mortgage splits your borrowing into two portions — one on repayment and one on interest only — giving you lower monthly payments than full repayment while still paying down a significant chunk of the capital. For example, on a £300,000 mortgage, you might have £200,000 on repayment and £100,000 on interest only.

This approach gives you lower monthly payments than full repayment while still ensuring that a significant portion of the capital is being paid down. At the end of the term, you would only need to find £100,000 to clear the remaining interest only element rather than the full £300,000.

Part and part arrangements are also commonly used when switching from a fully interest only mortgage where the borrower cannot afford the jump to full repayment.

How does each mortgage type affect your equity?

With a repayment mortgage, you build equity with every payment — after 10 years on a £300,000 loan, you would have paid off roughly £85,000 of capital; with interest only, your balance stays at £300,000 and equity growth relies entirely on property price rises. After 10 years on a £300,000 repayment mortgage at 4.5% over 25 years, the outstanding balance would have dropped to approximately £215,000, plus any property price growth.

With interest only, the balance remains at £300,000 throughout. Your only equity growth comes from property price appreciation. While UK property prices have historically trended upwards over the long term, this is not guaranteed, and there have been periods of price falls. If property prices decline, an interest only borrower is more exposed to negative equity because their loan balance has not reduced.

Are there any tax differences between interest only and repayment?

For residential owner-occupiers, there is no difference — neither type gets tax relief on mortgage interest. For buy-to-let landlords, the 20% tax credit applies equally, though interest only borrowers pay more interest overall and may claim a higher total credit.

For buy-to-let landlords, the picture is different. Since April 2020, mortgage interest is no longer deductible as an expense against rental income for individual landlords. Instead, a 20% tax credit is available on the mortgage interest paid. This applies equally to interest only and repayment mortgages, but because interest only borrowers pay more interest overall (the balance does not reduce), the total tax credit may be higher over the term. For more on BTL interest only, read our interest only buy-to-let mortgage guide.

How do you decide between interest only and repayment?

1. 01

   Assess your eligibility

   Check whether you meet the criteria for residential interest only (typically £75,000+ income, 50% max LTV, credible repayment vehicle). If not, repayment or part and part may be your options.

2. 02

   Run the numbers

   Use a mortgage calculator to compare monthly payments and total costs for both types. Consider what you would do with the monthly savings on interest only — is there a realistic plan to grow those funds?

3. 03

   Consider your repayment strategy

   If choosing interest only, be honest about whether you have the discipline and financial knowledge to maintain a repayment vehicle over 25+ years. Markets can be volatile.

4. 04

   Think about your life stage

   A younger borrower may benefit from the flexibility of interest only if they expect their income to grow. An older borrower may prefer the security of knowing the mortgage will be cleared before retirement.

5. 05

   Speak to a broker

   A qualified mortgage adviser can model both scenarios for your specific circumstances, help you weigh the risks, and find the most competitive deals across the market.

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