Repayment Mortgage

A repayment mortgage (also called a capital and interest mortgage) requires the borrower to pay both the interest on the loan and a portion of the capital balance each month. Payments are typically structured so that the entire balance is repaid by the end of the mortgage term.

In contrast to an interest-only mortgage (where only the interest is paid and the full capital remains outstanding), a repayment mortgage gradually reduces the outstanding debt. By the end of the term, the property is owned outright with no mortgage.

For BTL investors, most choose interest-only mortgages to minimise monthly payments and maximise cashflow. However, repayment mortgages have advantages: you build equity through paydown over time, there is no end-of-term capital repayment risk, and lenders sometimes offer marginally better rates on repayment products.

The monthly payment on a repayment mortgage is higher than on an interest-only mortgage for the same balance and rate. On a £100,000 mortgage at 5.2% over 25 years, repayment costs approximately £600/month versus £433/month interest-only. The extra £167/month is equity building rather than income.

For investors focused on long-term wealth building rather than short-term cashflow, repayment mortgages have merit. The monthly shortfall versus interest-only should be viewed as forced savings.