What is the Difference Between Interest Only and Capital Repayment Mortgage?

The main difference between an interest-only and a capital repayment mortgage lies in the way you repay the loan to your lender. Here are the key differences between the two:

Interest-Only Mortgage:

• Monthly payments cover only the interest charged on the loan.
• The capital (the amount borrowed) remains the same until the end of the term.
• At the end of the mortgage term, the capital will need to be paid in full.
• Lower monthly repayments, as you are only paying the interest.
• Optional capital payments can be made, allowing you to chip away at your mortgage debt during the term if you want to.

Capital Repayment Mortgage:

• Monthly payments cover both the interest and a portion of the capital.
• The capital borrowed gradually reduces over time.
• At the end of the mortgage term, the capital will have been fully repaid.
• Higher monthly repayments, as you are paying both interest and capital.
• The mortgage debt is paid off across the term, which is typically 25 years, but can be longer or shorter.

In summary, an interest-only mortgage allows you to make lower monthly payments by only paying the interest, while a capital repayment mortgage requires higher monthly payments as you pay both interest and capital. At the end of the term, the capital must be paid in full for an interest-only mortgage, whereas the capital is gradually reduced and repaid in full for a capital repayment mortgage.

Comparative Table: Interest Only vs Capital Repayment Mortgage

The main difference between an interest-only and a capital repayment mortgage lies in the way you repay the loan to your lender. Here is a table summarizing the key differences between the two types of mortgages:

An interest-only mortgage offers lower monthly payments, but you must pay off the loan in full at the end of the loan term. On the other hand, a capital repayment mortgage has higher monthly payments, but the loan is fully repaid by the end of the term. It is essential to consider your financial situation and long-term plans when choosing between these two mortgage types.