Interest-only vs repayment mortgages Repayment mortgages explained
If you're looking for a mortgage, there are two main options: a repayment mortgage or an interest-only mortgage. We explain below how the repayment option works, and the previous page of this guide explains all you need to know about interest-only mortgages.
Repayment mortgages are also known as 'capital and interest' mortgages. As the name suggests, you gradually pay off the amount you borrowed over the term of the loan (the 'capital'), together with interest. You make one payment each month to your lender.
In the early years, most of your mortgage payment goes towards repaying the interest, with a small part allocated against the capital. Over time, the balance switches, so you're paying off an increasing amount of the capital each month. As a result, you may find that you don't pay off much capital for the first few years.
On the plus side, unlike interest-only deals, repayment mortgages guarantee that the whole loan is repaid by the end of the term. They can also make it easier to get a more competitive deal in the future - as you're gradually paying off the capital, the amount you're borrowing as a proportion of the value of your home (the 'loan-to-value') falls over time, so if you decide to switch mortgage after a few years, you should be able to secure a more competitive interest rate.
Which? mortgage calculators
Whether you plan to take out a repayment or interest-only mortgage, use the mortgage calculators offered by Which? Mortgage Advisers to find out what your repayments would be at different interest rates, how much you could borrow and how much you can afford to repay on a mortgage.
Life insurance to cover your mortgage repayments
If you have a family or other dependents and want to make sure your mortgage is paid off if you die, it's worth considering a life insurance policy.
Under a repayment mortgage, the outstanding capital you owe reduces over the term of the mortgage. The cover offered by a 'decreasing-term' life insurance policy mirrors this reduction and falls over time in line with the amount you owe on your mortgage. As the potential insurance payout drops as time progresses, decreasing-term life insurance policies can work out cheaper than the 'level-term' alternative, under which the sum insured stays the same throughout.
Need mortgage advice?
We believe you should seek independent mortgage advice before taking out a mortgage. The Which? Group offers an independent mortgage advice service, Which? Mortgage Advisers, that looks at every mortgage from every available lender. You can also find an independent mortgage adviser using Unbiased.co.uk.