Repayment Mortgages: What are the Advantages and Disadvantages?

May 13, 2010
Carol Finch

How do Repayment Mortgages Work? - Image by svilen001

Many UK consumers use a repayment mortgage to buy a property rather than an interest only loan. How do repayment mortgages work & what are the pros & cons?

Repayment mortgages (also known as capital and interest loans) tend to be the home loan of choice with most UK consumers. This remains the most straightforward choice for many, although some may consider interest only alternatives. How do repayment mortgages work and what are the advantages and disadvantages of this kind of finance?

How do Repayment Mortgages Work?

A repayment mortgage takes the regular monthly payments made by a homeowner and uses them to pay back borrowing. Each payment that is made will be divided between paying off some interest and some of the original capital borrowed. At the end of the mortgage loan, if all repayments have been made, the homeowner will own their property outright.

The other primary UK mortgage option is the interest only deal. This kind of loan works slightly differently. Repayments made all go towards paying off interest. The capital borrowed needs to be paid back separately at the end of the term as a lump sum.

What are the Advantages of a Repayment Mortgage Loan?

There are a few advantages to this kind of mortgage that make this a popular option for many consumers. These include:

When the mortgage term ends, the homeowner will have paid back all that they owe in full.
Mortgage commitments will go down over the years as repayments are made.
There is no need to set up investments to deal with the mortgage unlike interest only products where monthly payments only service interest charges.

Some may, however, find that a repayment mortgage may not be the best option for them. It may also be worth considering any downsides before choosing a loan type.

What are the Disadvantages of Capital and Interest Repayment Mortgages?

Some homeowners do find that repayment mortgage loans may not suit them as well as interest only options. Some of the possible disadvantages include:

Monthly repayment costs may be higher than the base costs of an interest only product.
Initial payments are geared towards paying back interest rather than capital so it can take time to build up equity.

Many favour repayment mortgages because of their simplicity. Most will find that making the right choice of loan may take some research. Those interested in learning more about the process and the options on offer may find the following articles useful: