Interest-only vs repayment
On a repayment mortgage you pay off interest and capital, so the debt clears by the end of the term. On interest-only you pay just the interest, keeping monthly costs low, but the full capital is still owed at the end and must be repaid another way.
Repayment mortgages
| Factor | Repayment | Interest-only |
|---|---|---|
| Monthly payment | Higher — covers interest and capital | Lower — interest only |
| Capital at end of term | Cleared in full | Original loan still owed in full |
| Builds equity | Yes | No (relies on a separate repayment plan) |
| Repayment plan required | No | Yes — savings, investments or sale of the property |
| Typical use | Main residential home | Buy-to-let, to maximise rental cash flow |
Each monthly payment covers the interest and chips away at the capital, so provided you keep paying, the loan is fully cleared at the end of the term. It costs more per month than interest-only but builds equity and removes the worry of a lump sum due at the end.
It’s the standard choice for residential buyers who want to own their home outright.
Interest-only mortgages
You pay only the interest each month, so payments are lower, but the capital you borrowed remains owed in full at the end of the term. Lenders require a credible repayment plan — savings, investments, or the sale of the property.
It’s most common in buy-to-let, where investors maximise monthly rental cash flow and repay the capital from the eventual sale.
Which suits a contractor?
- Repayment for your main home — certainty and equity.
- Interest-only for investment property, to maximise yield.
- Offset can pair with either to cut interest using your cash reserves — see offset mortgages.
The question lenders really ask about interest-only
Not whether you can afford the monthly payment — that part is easier, since you are only covering interest — but how the capital gets repaid at the end. Lenders require a credible, evidenced repayment strategy, and they revisit it during the term rather than taking it on trust at the outset.
Acceptable strategies vary by lender but typically include investments, pension proceeds, or the sale of another property. Vague intentions to "sell up and downsize" are treated with far more scepticism than they once were. Remortgaging an interest-only mortgage covers what lenders want to see.
What each costs over the term
Interest-only gives a lower monthly payment and a balance that does not fall. Repayment costs more each month and clears the debt entirely by the end. Over a full term the interest-only route usually costs considerably more in total interest, precisely because the balance never reduces.
The amortisation calculator shows the repayment side year by year — how the split shifts from mostly interest to mostly capital — which makes the comparison concrete rather than abstract. There is also a practical consequence for your loan-to-value: with a repayment mortgage it improves as you pay down, which can open better pricing at remortgage. On interest-only it only improves if the property's value rises.
Where interest-only genuinely fits
It is standard on buy-to-let, where the rental yield is the point and the property itself is usually the eventual repayment. Many landlords hold interest-only deliberately rather than as a compromise.
On a residential mortgage it is a narrower fit — most often for borrowers with genuinely lumpy income or a clear, evidenced capital event ahead. Part-and-part, splitting the loan between the two, is sometimes the more practical answer for a contractor whose earnings vary but who still wants the balance to fall.
Interest-only vs repayment, answered
Is interest-only cheaper?+
Monthly, yes — you’re not repaying capital. But over the full term you pay more interest and still owe the original loan at the end, so it’s only cheaper in the narrow sense of monthly cash flow.
Can I get interest-only on my home?+
It’s possible but lenders apply stricter criteria for residential interest-only, including a credible repayment strategy and often higher equity. It’s far more routine for buy-to-let.
Can I switch between the two?+
Often, subject to the lender’s criteria and affordability. Many landlords use interest-only; many residential borrowers move to repayment for the certainty of clearing the debt.
Can contractors get an interest-only mortgage?+
Yes, where the case meets the lender's criteria — which usually means a credible repayment strategy and often a lower loan-to-value than a repayment mortgage would require. Being a contractor is not itself the obstacle; the repayment plan is what the assessment turns on.
Can I switch from interest-only to repayment?+
Generally yes, and lenders are usually receptive since it reduces their risk. The monthly payment rises, sometimes substantially, because you are now clearing capital as well as interest. Some lenders also allow a partial switch, moving part of the balance to repayment while leaving the rest as it is.