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A repayment mortgage means your monthly payment covers both the interest and part of the capital you borrowed, so the balance reduces over the term and reaches zero by the end. An interest-only mortgage means your monthly payment covers only the interest, so the capital you borrowed is still owed in full at the end of the term and needs a separate plan to repay it.
How a repayment mortgage works
Each monthly payment on a repayment mortgage is split between interest and capital. Early in the term, more of the payment goes towards interest, and this shifts gradually so more goes towards the capital as the balance falls. By the end of the agreed term, assuming payments have been kept up, the mortgage is cleared in full. This is the more common type of mortgage for most homeowners.
How an interest-only mortgage works
With an interest-only mortgage, your monthly payment only covers the interest charged on the amount you borrowed. The capital itself does not reduce, so at the end of the term you still owe the full amount you originally borrowed. Lenders offering interest-only mortgages need to see a credible plan, known as a repayment strategy, for how you will clear that capital, such as an investment, savings, an expected inheritance, or selling the property. Our page on interest-only remortgages with bad credit looks at what happens when that term is ending and adverse credit is also part of the picture.
Comparing the two
| Repayment | Interest-only | |
|---|---|---|
| Monthly payment | Higher, covers interest and capital | Lower, covers interest only |
| Balance at end of term | Zero, assuming payments kept up | Full capital still owed |
| Requires a repayment strategy | No | Yes, checked by the lender |
| Availability | Widely available | Fewer lenders, particularly for adverse credit |
How lenders assess each type
Interest-only lending is assessed differently to repayment lending in one important respect: the lender needs evidence of the repayment strategy, not just the ability to afford the monthly interest payment. Our guide on what a mortgage stress test is explains that affordability checks still apply on top of this. Lenders also want to see that the strategy is realistic given how much time is left on the term, which is why interest-only terms ending soon can be a particular pinch point.
Retirement interest-only mortgages
A retirement interest-only mortgage, often called a RIO, is a regulated interest-only mortgage typically aimed at older borrowers, where the loan is usually repaid when the home is sold, often after the borrower dies or moves into long-term care. It is a different product from a repayment or standard interest-only mortgage, and from equity release. Our page on later life remortgages with bad credit explains how age, income and adverse credit fit together for older homeowners; we do not recommend a RIO or any specific product, since this needs specialist advice.
Does bad credit change the choice?
Adverse credit does not change how repayment and interest-only mortgages work, but it does affect the range of lenders willing to offer either. Interest-only lending already has fewer providers than repayment lending across the market, and a CCJ, default, or other credit issue narrows the field further on top of that. Some specialist lenders do consider interest-only applications alongside adverse credit, provided the repayment strategy stands up to scrutiny, so it is worth getting advice before assuming this route is closed to you.
A worked illustrative example
These figures are for illustration only and are not a quote of any real rate or lender’s terms. Suppose someone borrows the same amount on a repayment basis and, separately, considers what an interest-only mortgage on the same amount would look like. On repayment, part of each monthly payment reduces the capital, so after several years of the term the balance owed has fallen, even though the monthly payment has been higher throughout. On interest-only, the monthly payment is lower throughout, which can help affordability in the early years, but after the same number of years the full amount originally borrowed is still owed in full, since nothing has gone towards the capital. The interest-only borrower needs their separate repayment strategy, such as savings or selling the property, to have grown or become available by the time the term ends, otherwise the capital is still due with no obvious way to clear it.
Common mistakes with interest-only and repayment decisions
- Choosing interest-only mainly to reduce the monthly payment, without a clear, evidenced plan for repaying the capital. Lenders need to see the repayment strategy, not just an intention to sort it out later.
- Leaving the repayment strategy review too late. If the strategy relies on an investment, inheritance or sale, checking its progress only when the term is close to ending leaves little time to change course if it has fallen short.
- Assuming switching from interest-only to repayment is automatic. It usually needs the lender’s agreement, and the monthly payment rises because the capital starts being repaid too, so check affordability for the new payment ahead of time.
- Not considering a part-and-part mortgage. Some lenders offer a mortgage split between an interest-only portion and a repayment portion, which can suit some circumstances, though this is a lender-specific option to ask about rather than something available everywhere.
- Assuming adverse credit rules out interest-only entirely. It narrows the field of lenders rather than closing the door completely, so it is worth getting advice on which specialist lenders currently consider interest-only alongside a CCJ, default or other credit issue.
What this means for a bad credit remortgage
If your current mortgage is interest-only and your credit history has changed since you took it out, it is worth reviewing your repayment strategy well before the term ends, since options such as switching to repayment, extending the term or selling the property can take time to arrange. Where raising extra money is also part of the plan, our page on releasing equity with bad credit covers borrowing more against your home, and our guide on what equity in a house means explains the underlying figure that any of these routes depends on.
Frequently asked questions
Is an interest-only mortgage cheaper each month?
The monthly payment is usually lower than an equivalent repayment mortgage, since you are only paying the interest. The capital you borrowed is still owed in full at the end of the term, so it is not cheaper overall, and total interest paid can be higher over a long term.
What counts as an acceptable repayment plan for interest-only?
Lenders commonly accept plans such as an investment or savings vehicle already in place, an expected inheritance with evidence, or selling the property, known as downsizing. Policies and acceptable evidence vary between lenders, so check what a specific lender will accept.
Can you switch from interest-only to repayment part way through?
Often, yes, either at your existing lender or as part of a remortgage, though moving to a repayment basis usually raises the monthly payment, since you start clearing the capital too. Ask your lender about switching before the interest-only term ends.
Does bad credit make it harder to get an interest-only mortgage?
It can. Interest-only lending already has fewer lenders than repayment lending, and adding adverse credit narrows the field further. Some specialist lenders do consider interest-only cases with a credit issue, so it is worth getting advice rather than assuming it is not possible.