On a repayment mortgage your monthly payment covers the interest and chips away at the loan, so at the end of the term you own the house outright. On an interest-only mortgage you pay just the interest each month, and the whole amount you borrowed is still owed on the last day. Interest-only is much cheaper month to month, but you need a separate, solid way of paying the loan back.
How a repayment mortgage works
Your lender works out a fixed monthly figure that clears the debt exactly by the end of the term, assuming the rate doesn't change. In the early years most of each payment is interest because the balance is still large. As the balance falls, less goes on interest and more goes on the loan itself, so the debt shrinks faster towards the end.
That's why people are often surprised how little the balance has moved after the first few years. It's normal, and it speeds up.
How interest-only works
The sum is simpler. Take the balance, multiply by the yearly rate and divide by 12. Because the balance never goes down, the payment stays the same (if the rate does), and so does the debt. At the end of the term you have to hand over the full amount, usually by selling the property, cashing in investments or using a pension lump sum.
Worked example: £200,000 over 25 years
Here's a £200,000 mortgage over 25 years at an example rate of 4.5%, with the rate assumed to stay the same throughout.
| Repayment | Interest-only | |
|---|---|---|
| Monthly payment | £1,111.66 | £750.00 |
| Total paid over 25 years | £333,499 | £225,000 |
| Of which interest | £133,499 | £225,000 |
| Still owed at the end | £0 | £200,000 |
Interest-only saves £361.66 a month. But over the full term you pay £91,501 more in interest, and you still owe the original £200,000. Add that on and the interest-only route has cost £425,000 in total against £333,499 on repayment.
The gap changes with the rate. At example rates of 4%, 5% and 5.5%, the repayment figure would be £1,055.67, £1,169.18 and £1,228.17 a month, against interest-only payments of £666.67, £833.33 and £916.67. You can try your own numbers in the mortgage calculator and the interest-only mortgage calculator.
Who interest-only can suit
For most people buying a home to live in, repayment is the sensible default. Interest-only makes more sense in a narrower set of cases:
- Buy-to-let landlords. Most buy-to-let mortgages are interest-only. The rent covers the interest, and the plan is to sell the property or refinance at the end.
- People with a large, reliable pot elsewhere. For example, substantial investments or a pension that will clearly be big enough to clear the loan.
- Downsizers with lots of equity. Someone who owns most of a valuable home and plans to sell and move somewhere cheaper may use interest-only, though lenders still check the sums carefully.
- Part and part. You can split a mortgage, with some on repayment and some on interest-only. It lowers the monthly cost without leaving the whole balance outstanding.
Interest-only is a poor fit if the plan to repay is vague, such as "the house will have gone up in value" or "I'll sort it later". If prices fall or your circumstances change, you could be left with a debt you can't clear and a forced sale.
What lenders ask for
Residential interest-only mortgages are harder to get than they used to be. Criteria vary a lot between lenders, but you can usually expect:
- A credible repayment strategy, with evidence. Lenders tend to want to see named investments, pensions or property, not a promise.
- A lower loan-to-value than on repayment, so a bigger deposit or more equity.
- A minimum income, which can be well above average for some lenders.
- Regular reviews during the term to check the repayment plan is still on track.
Some lenders will only accept selling the home as the plan if you have a lot of equity. Others won't accept it at all. A mortgage broker can tell you which lenders fit your situation.
Can you switch between the two?
Usually, yes. Moving from interest-only to repayment raises your monthly payment but is normally straightforward, especially when your deal ends. Going the other way is harder, because the lender will assess you as a new interest-only borrower with all the checks above.
If you're on repayment and money is tight for a while, ask your lender what options they have before missing a payment. A temporary switch to interest-only or a longer term is sometimes possible.
This is general information, not financial advice.
Last reviewed October 2026.