Repayment mortgages explained

A repayment mortgage is the standard way to buy a home in the UK: each monthly payment covers both the interest the lender charges and a slice of the amount you borrowed, so the debt is cleared in full by the end of the term. The Financial Conduct Authority's glossary defines it as a regulated mortgage contract under which the customer must make payments of interest and capital "which are designed to repay the mortgage in full over the stated term"¹. Shelter Cymru puts the same idea more plainly: "If you choose a repayment mortgage, you pay back the capital and the interest together"².

It is, by a wide margin, the more common type of deal³. Because the balance falls every month, a repayment mortgage carries the least risk of the main mortgage types: at the end of the term, if all repayments have been made, the mortgage is repaid and the borrower owns the property outright⁴. This page explains how the balance falls over time, why the early years are mostly interest, what the term length does to the total cost, and how a repayment mortgage compares with an interest-only loan.

How a repayment mortgage works: capital and interest together

Every monthly payment on a repayment mortgage does two jobs at once. Part of it pays the interest the lender charges on the outstanding balance; the rest reduces the amount borrowed, known as the capital. StepChange describes a capital repayment mortgage as one that "requires a person to make monthly repayments to the capital balance borrowed for an agreed period of time (known as the term) until you have paid back both the capital and the interest in full"⁹. The Building Societies Association uses the same structure: monthly repayments to the lender "includes an element of the capital (i.e. the initial loan amount) and also the interest"⁴.

The effect is that the loan shrinks steadily from the first month. Which? describes it as paying "off a bit of the loan as well as some interest as part of each monthly payment"³. Because the interest charged each month is worked out on the remaining balance, the interest element of the payment falls as the debt falls, and a growing share of each payment goes towards the capital. This steady reduction is what people in the mortgage market call amortisation, though lenders rarely use the word with customers.

Two things follow from this structure. First, the payments are higher than on an interest-only loan for the same borrowing, because you are paying down the debt as well as the interest. Second, the equity in your home grows from two directions at once: the balance falls and, if property prices rise, the home's value rises. Both effects are why most mortgage providers and clients prefer repayment mortgages¹⁰.

The same idea appears in products built on a repayment basis. An offset mortgage, for example, links your savings to the loan to reduce the interest charged, but "your capital repayments are still based on the full loan amount", so the debt still clears over the term⁷. Scotland's First Homes Fund requires the mortgage to be "capital repayment and not interest-only"¹¹.

The first payment and the early years

The first mortgage payment is usually larger than the regular monthly amount, and this catches many borrowers out. That is because the first payment includes an initial interest payment covering the days between completion and the end of that month, so it can be several weeks of interest plus the normal monthly amount rolled into one¹². After that, payments settle to the regular figure shown in your mortgage offer.

In the early years, most of each payment is interest. Interest is charged on the outstanding balance, and at the start that balance is at its largest, so the interest element is at its largest too. Only a small slice of each early payment reduces the loan itself. As the years pass the balance falls, the interest charged on it falls with it, and a growing share of the same monthly payment goes towards the capital. The pace of the debt reduction accelerates in the second half of the term, which is why the balance chart falls slowly at first and then faster.

This has practical consequences. In the first few years of a mortgage, the amount you owe barely moves, which can feel discouraging, but the structure is working exactly as designed. It also means that overpaying early in the term saves more interest than the same overpayment later, because the money comes off a balance that would otherwise be charged interest for longer. The dedicated guide to overpaying your mortgage covers this in detail.

What it costs over the full term

The total cost of a repayment mortgage is the amount borrowed plus all the interest charged over the term. The figures are large because the term is long. Which? gives a worked example: £300,000 borrowed over 25 years at 5% interest results in £226,131 in interest, meaning you pay back £526,131 over the lifetime of the mortgage¹².

A second example at a lower rate shows the same pattern. A £250,000 repayment mortgage at 3% over 25 years costs £1,186 a month, and over the term you would pay £105,800 in interest¹³. The rate matters enormously: the same borrowing at 5% rather than 3% can more than double the interest bill.

The term length changes the total as well as the monthly amount. Extending a £300,000 mortgage at 5% from 25 to 30 years reduces the monthly repayment to £1,610.46, but the total repaid rises to £579,767.35, an extra £53,636.31 compared with the 25-year term¹². A 40-year mortgage costs more still: on a worked example at 5% for the entire term, a 40-year mortgage would cost £103,000 more than a 25-year term¹⁴.

Overpayments cut the total in the other direction. On a £200,000 mortgage over 30 years at 5%, with no overpayments you take the full 30 years to clear the debt and repay £386,512 in total⁵. Overpaying £100 a month shortens the term by 5 years and 2 months and saves £37,314; £150 a month shortens it by 7 years and 1 month and saves £50,567; £250 a month shortens it by 10 years and 1 month and saves £70,796⁵.

Two smaller costs are worth knowing about. If your rate is variable, a rise in the Bank of England base rate feeds through to your payment: on a £250,000 balance at 4.5% over a 20-year term, a 0.25 percentage point rise increases the monthly payment by £33.94¹⁵. And adding a mortgage fee to the loan rather than paying it upfront costs more over time: in one first-time buyer example, adding the fee to the loan cost just over £316 extra over a five-year fixed term, and £480 extra over a two-year term in a remortgage example¹⁶. The guide to mortgage fees and charges covers these costs.

Mortgage terms: 25 years is typical, 40 years is possible

A mortgage is repaid in monthly instalments over a set period, for example 25, 30 or 35 years⁶. Citizens Advice Scotland describes the typical arrangement as a long period, usually up to 25 years, repaid by monthly instalments and secured on the property¹⁷. Housing Rights notes that lenders offer different mortgage terms, usually 25 to 30 years⁸.

Longer terms have become more common because they cut the monthly payment, which helps with affordability. The trade-off is the total: as the examples above show, a 30-year term on £300,000 at 5% costs £53,636.31 more than a 25-year term, and a 40-year term costs £103,000 more than a 25-year term on the worked example¹². A longer term also means the balance falls more slowly, so you build equity more slowly and stay exposed to negative equity for longer.

Shorter terms do the opposite: higher monthly payments, less interest in total, and a faster route to owning the home outright. The right term depends on what the monthly payment needs to be, and it can be changed later. Extending the term is one of the options lenders may offer if payments become unaffordable¹⁸, and the FCA's mortgage rules permit term extension as a form of switch a lender can offer an existing customer¹⁹. The guide to mortgage terms and extending your mortgage term covers the options.

Overpayments: usually up to 10% a year without a charge

Most mortgages allow you to overpay a certain amount, usually around 10% per year, without incurring any additional charges¹². The allowance is typically 10% of the outstanding balance each year, and it applies to fixed-rate mortgages as well as most other types²⁰. Which? reports the same figure: typically, you can overpay up to 10% of your mortgage balance each year without being charged²¹.

The mechanics are flexible. Most fixed-rate mortgages allow overpayments of up to 10% of the balance each year, either in regular overpayments or on an ad-hoc basis²¹. Overpaying more than the allowance in a 12-month period may trigger an early repayment charge²¹, so the allowance is a limit worth knowing before making a lump sum payment.

Overpaying works directly on the balance, which is why it saves so much: every pound overpaid is a pound that stops being charged interest for the rest of the term. The examples above show the scale: £250 a month on a £200,000 mortgage over 30 years at 5% clears the debt 10 years and 1 month early and saves £70,796⁵. Whether overpaying beats saving the money instead depends on the rates involved and on whether you need an emergency fund; the comparison page on overpaying the loan or saving the money sets out the trade-offs.

Early repayment charges: often 5% of the balance in year one

An early repayment charge is, in the FCA's official definition, "a charge levied by the mortgage lender on the customer in the event that the amount of the loan is repaid in full or in part before a date or event specified in the contract"²². In practice it is a financial penalty often included in fixed rate mortgages, applying if the mortgage is repaid early over the fixed rate period²³.

The charge is usually a percentage of the balance that steps down each year of the deal. On a five-year fix, the ERC might be 5% of your mortgage balance in year one, 4% in year two, 3% in year three, and so on²⁴. Which? reports the same pattern: ERCs on five-year fixes often start at around 5% of the balance in the first year, before reducing by 1% each year thereafter²¹.

The charge matters most when you sell your home or remortgage during the deal period. If you are still in the introductory period of your mortgage when selling, you can use the proceeds of the sale to pay off the mortgage, although you may incur an early repayment charge³. The exact percentage, what it is measured against and when it stops applying are set out in your mortgage illustration and offer. The dedicated guide to early repayment charges covers how the charge is shown and when it may not apply.

Repayment or interest-only: how each one behaves

The alternative to a repayment mortgage is an interest-only mortgage. As the Financial Ombudsman Service explains, "With an interest-only mortgage, monthly repayments just cover the interest on the mortgage"²⁵, and the capital is paid off at the end of the term in one go. Independent Age puts the same point: borrowers just repay the interest, with the full loan payable at the end of the term²⁶. Which? describes it as paying only the interest each month, "meaning you have to pay off the entire loan at the end of the mortgage term"³.

The monthly cost is the visible difference: interest-only payments are lower than on repayment mortgages²⁶. The hidden difference is what happens at the end. On a repayment mortgage the debt is gone; on an interest-only mortgage the full amount is paid back at the end of the mortgage term in one lump sum¹³, and the borrower needs a plan to produce that money.

The risk difference follows. Shelter Cymru notes that interest-only mortgages are "slightly more risky than repayment ones, because there is no guarantee that the proceeds from the endowment, ISA or other policy will cover the whole sum you borrowed in the first place", which is why the repayment type carries least risk². If an interest-only loan has not been repaid by the end of the term, lenders will have the legal right to repossess your home¹³.

The total interest paid over the term is also higher on interest-only, because the balance never falls. On the £250,000 example at 3% over 25 years, the repayment mortgage costs £105,800 in interest, which is £81,700 cheaper than the interest-only mortgage on the same terms¹³. The comparison page on repayment vs interest-only and the main guide to interest-only mortgages go further into who each type tends to suit.

Moving home or switching from interest-only

Moving home does not automatically mean losing your mortgage. Many deals are portable, so you can apply to transfer the mortgage to a new property, though the lender will reassess your circumstances and the new home, and you may need to borrow more or less than before. The guide to porting a mortgage when you move home covers the process. If you are still in the introductory rate period, selling to pay off the mortgage can trigger an early repayment charge³, and some lenders will refund part of the ERC if you port and borrow again with them²⁴.

Switching from interest-only to repayment is a change many borrowers make when they realise they have no reliable way to repay the lump sum. It can be done by arranging a new deal or asking the lender to change the basis of the existing loan. The FCA's mortgage rules explicitly permit interest-only to repayment switches as a form of switch a lender can offer an existing customer¹⁹.

The reverse switch, from repayment to interest-only, is usually offered only as short-term relief. A temporary switch to interest-only payments means you just pay the interest, without repaying the loan itself, for a set period of time²⁷. StepChange is blunt about its limits: "This is not a long-term solution", because you only pay the interest and must pay the capital before the end of the term²⁸. Similar options when income drops include taking a mortgage payment holiday or extending the term¹⁸.

One trap catches separating couples. On a joint mortgage, both parties remain liable until a name is removed, and it is unlikely the mortgage lender will remove someone's name unless they are happy the other person can afford the repayments²⁹. The guide to joint mortgages, separation and transfer of equity covers this.

Where a repayment mortgage does not remove all risk

A repayment mortgage removes the biggest risk of an interest-only loan, the risk of not being able to repay the capital at the end. It does not remove the risks that come from any loan secured on your home.

The first risk is missed payments. If your home is repossessed or you hand over the keys to your lender, you will still be responsible for your mortgage payments until the home is sold³⁰. Handing back the keys does not clear the debt: if you voluntarily hand over the keys, you may still owe money⁸. The guides to mortgage arrears and repossession in England and Wales set out what happens and what help exists.

The second risk is negative equity. A repayment mortgage does not protect you if property prices fall: in Which?'s example, a £200,000 home bought with a £20,000 deposit and a £180,000 mortgage falls into negative equity after a 25% price fall, leaving the home worth £150,000 against £155,000 owed, negative equity of £5,000³¹. The balance falls each month, so the risk shrinks over time, but in the early years it is real. A very small number of specialist lenders offer negative equity mortgages, which enable you to transfer the negative equity to a new property, and your lender may allow you to repay a shortfall over time using a payment plan³¹. In Scotland, if your home is in negative equity, you may only get help from the Mortgage to Rent scheme³².

The third risk is the one built into the structure itself: the payment is calculated to clear the loan only if every payment is made for the whole term. If payments stop, the arithmetic stops with them. Lenders do have obligations to treat borrowers fairly when things go wrong, and the FCA's responsible lending rules allow a variation that reduces, including to zero, the capital repayments required under a repayment mortgage for a period of no longer than six months¹⁹. Free, impartial help is available: StepChange, National Debtline and Citizens Advice all advise on mortgage debt, and MoneyHelper is the government-backed service for general money guidance.

Buy-to-let and credit scores

Buy-to-let mortgages work differently from home loans. Buy-to-let mortgages are generally interest-only, rather than repayment³³, because landlords typically plan to sell or refinance rather than clear the debt. Repayment buy-to-let deals exist but are the exception; the guide to buy-to-let mortgages covers how these loans are assessed.

On credit scores, the balance falling is not itself what lenders see. What matters is the payment record. A missed mortgage repayment leaves a mark on your credit report that impacts your credit score, and that mark remains for six years¹². Arrears have consequences beyond the score: if you are in arrears with your mortgage or any other debts, your credit rating will be affected and it is unlikely you will get a good mortgage offer³⁴. This matters most when remortgaging, when a lender will base the application on your credit file, the value of your house, and how much you want to borrow³⁴. The guide to credit scores and credit reports explains how the system works.