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Repayment Mortgages Explained

Sep 03, 2024
Repayment Mortgage
If you need to take out a mortgage to buy your new home, one of the options is a repayment mortgage. Our guide explores the specifics of repayment mortgages, including how they work and their advantages and disadvantages.

What is a repayment mortgage?

A repayment mortgage spreads the cost of your loan across a set time frame, usually 25 years or more. You make regular monthly payments to pay off the loan gradually. Each payment includes the repayment amount and the interest charged by the lender. So, part of your monthly payment goes towards paying off your loan, and the other part covers interest costs. 
 
Over time, your loan balance decreases as you continue to make monthly payments. By the end of the mortgage term, you’ll have paid off the entire loan balance and interest and fully own your home. 
 
Here’s an example:
 
• Amount borrowed from the lender: £150,000
• Length of term: 25 years
• Interest rate: 5%
• Monthly payment costs: £877
• Total interest: £113,066
 

How do repayment mortgages work?

When you take out a repayment mortgage, you make monthly payments, which gradually pay off the loan. Let's break it down:
 
1. Interest-heavy start: In the first few years, most of your monthly payments go towards paying off the interest on the loan. The interest is calculated based on the remaining balance of your mortgage.
 
2. Higher capital repayments: As you continue making payments, a larger portion starts going towards your loan principal (the amount you borrowed). So, over time, payments become less weighted towards interest. 
 
3. Complete repayment: As long as you meet each monthly payment, your mortgage will be fully paid off by the end of the agreed term. Once it’s paid off and there’s no other debt secured against your home, you’ll own your home outright and be mortgage-free.
 

Types of repayment mortgages

Below, we’ve listed the different types of repayment mortgages. 
 

Fixed-rate mortgages

With a fixed-rate mortgage, the interest rate remains constant throughout the mortgage term, so your monthly payments are always the same.
 

Tracker mortgages

Tracker mortgages follow the Bank of England’s base rate, which means your monthly payments can change.
 

Standard variable rate (SVR) mortgages

With an SVR mortgage, your interest rate matches the lender’s standard variable rate. Because this isn’t fixed, your monthly payments can change. 
 

Discount mortgages

Discount mortgages are similar to SVR mortgages in that the interest rate is the same as your lender’s standard variable rate. However, you get a fixed discount for a specified period.
 

Guarantor mortgages

Taking out a guarantor mortgage means that a parent, family member or trusted friend guarantees your loan, agreeing to cover repayments if you can’t. They're a security blanket for the loan, reducing the risk for the lender.
 

How is a repayment mortgage different to an interest-only mortgage?

Repayment mortgages include monthly payments that cover the mortgage loan and the interest charge. With interest-only mortgages, your monthly payments are for the interest only. This means you must repay the loan as a lump sum at the end of the term.
 

Pros and cons of repayment mortgages

Opting for a repayment mortgage comes with advantages and disadvantages.
Pros Cons
Your mortgage will be fully paid off at the end of the term, and you’ll own your home.
 Your monthly payments will be higher compared to an interest-only mortgage. This is because you’ll be paying off both the loan and the interest. 
When you start paying off the original mortgage, the equity* in your home increases.
 Because payments are initially weighted towards interest, you won’t pay off much of your debt initially.
You’ll have lower overall interest payments compared to interest-only mortgages over the loan’s lifetime.
  
 
*Equity is the difference between the property value and the mortgage balance.
 
As with every big financial decision, it’s worth taking your time to weigh up your options. Seek expert advice whenever possible and conduct research to find the best deal, whether you opt for an interest-only or repayment mortgage.
 
Explore our brand-new, energy-efficient homes across the UK and fantastic homebuying offers.
 
Contact our Sales Advisers today to get started.  
 

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