Interest only vs. repayment mortgages

Take a look at the key differences between two types of mortgages, interest-only and repayment mortgages.

Our guide to the different types of mortgage

There are basically two types of mortgage:

  1. Interest only mortgages - do not repay the amount loaned you only pay the interest - this can be fixed at an amount or tracked against the bank of England's interest rates - at the end of the loan (normally 25 years) you will still owe the original amount.

  2. Repayment mortgages - repay the capital amount borrowed alongside the interest - over the term of the loan you will gradually owe less and less money. The repayments tend to stay pretty regular. At the beginning a large proportion of the amount you pay is interest and a little bit of capital repayment, and towards the end, you owe less and so a large proportion of what you pay is capital repayment and only a little interest. If this is not your primary residence you will need to pay tax on the capital repayments, so your tax liability will be heavier towards the end of the term of your loan.

Within these parameters there are all sorts of mortgages or ‘mortgage products' as they are known in the industry that are available - from trackers to fixed, to variable rates; they change fairly frequently and of course are not quite as appealing as they were a few years ago! Make sure you understand what kind of mortgage you are taking out and what the contract ties you into.