Capital repayment mortgages

If you take out a mortgage, you’ll be required to repay the capital and interest of the loan by the end of your mortgage term. One of the most common ways to repay a mortgage is by making regular repayments, often monthly, to gradually reduce the loan’s entirety over the mortgage term.

This is what’s called a capital repayment mortgage. If you’re thinking of applying for one, check your eligibility but crucially, do your research to get the right agreement for you, as well as the right price.

What is a capital repayment mortgage?

Your repayments for a capital repayment mortgage chip away and slowly reduce your mortgage debt, repaying both the capital and the interest.

Capital repayment mortgages can span between 5-40 years but many borrowers opt for a repayment term of 25 years.

At the start of the mortgage term, repayments go towards covering more interest than capital, but as the debt decreases, so does the interest and so by the end of the mortgage term, the bulk of monthly repayments goes towards paying off the capital.

How does a capital repayment mortgage work?

Because the mortgage repayments made towards the beginning of the agreement pay off more interest on the loan as opposed to capital, it can seem like the actual amount borrowed (the capital balance) isn’t being decreased much at all.

Over time though, as more mortgage repayments are made, the capital of the mortgage will decrease.

Capital repayment mortgage example

Let’s say that you take out a capital repayment mortgage with a term of 25 years.

You borrow £200,000 and your lender charges you 3.5% in interest. The capital of your loan is £200,000 but over 25 years, you’ll also repay £100,477 in interest.

In the first year of your mortgage, you’d pay £6,918.76 in interest and £5,096.20 towards the capital of your mortgage (the bit you actually borrowed to buy the property).

Your monthly mortgage repayment would be £1,002 and this would cover the interest and the capital of the loan. This monthly cost never changes, unless you decide to remortgage later down the line to a new rate or lender.

Over time, the amount you pay for the capital of the loan gradually increases whereas the amount you pay in interest decreases.

Your monthly mortgage repayments remain the same until they stop at the end of the mortgage term, once the complete balance has been repaid in full and on time.

Capital repayment mortgages vs interest-only mortgages

An interest-only mortgage would allow you to only repay the interest of the loan, as opposed to the interest and capital. The capital (the bit you use to pay for your property) gets cleared at the end of the mortgage, either from the sale of the house or from savings.

They’re fairly popular with buy-to-let investors that want access to their liquidity so that they can invest it elsewhere but residential interest-only mortgages are sought after by regular homeowners too.

Sometimes people prefer the lower monthly repayments that come with an interest-only mortgage as it reduces their outgoings but these types of mortgages carry greater risk potentially.

Capital repayment mortgage repayment vs interest-only mortgage repayment example

Using the same example as above which is based on a 25-year term and 3.5% rate, an interest-only mortgage would have monthly repayments of £584 but at the end of the contract, you would have a capital balance of £200,000.

A capital repayment mortgage would have monthly repayments of £1,002 but at the end of the contract, you would have no capital balance to pay.

Over the full 25 year period, you would have paid £174,900.00 in interest with an interest-only mortgage, whereas you would only pay £100,477 of interest with a capital repayment mortgage, making it much cheaper.

What's the difference between capital repayment and interest-only mortgages?

What types of repayment mortgages are there?

Fixed-rate mortgages
The interest rate you’re charged on this type of mortgage arrangement is fixed and therefore doesn’t go up or down, even if interest rates change in line with the BOE base rate.

This can be good for borrowers that want to know exactly how much they’ll pay every month, with the knowledge that it won’t change.

Tracker mortgages
Your interest rate tracks the base rate plus a set percentage that the lender charges on top. If the Bank of England announced an increase to the base rate, your monthly mortgage repayment would go up as you would be charged more interest.

However, if they were to decrease, your monthly mortgage repayments would go down because you would be charged less interest.

Offset mortgage
You have a savings account linked to your mortgage and the balance of those savings is used to offset the amount of mortgage that you’re charged interest on.

So, for example, the balance of your mortgage might be £200,000 but you have savings of £10,000, so this is offset against your mortgage debt, meaning you only pay interest on £190,000, saving you money.

You can still access your savings but if you do, the amount of mortgage that you pay interest on increases or decreases in proportion with how much remains in the account.

Offset mortgage guide available here for further reading.

Guarantor mortgages
A close relative like your parents or grandparents agree to guarantee your mortgage, so if you fail to make your repayments, their property or savings could be at risk.

Guarantor mortgage guide available here for further reading

Is a capital repayment mortgage the same as a repayment mortgage?

Yes. These are two common phrases used to describe a mortgage which consists of monthly payments that typically repay the capital amount borrowed as well as the accrued interest.

Repayment mortgages have lots of variations which each affect the amount you repay per month and the dependency of the interest you’re charged.

Where can I find a repayment mortgage calculator?

There are lots of capital repayment mortgage calculators online but the problem with these is that they don’t provide an accurate reflection of the outcome for the unique circumstances of every borrower.

They’re good for getting a rough idea but typing in a property value and interest rate won’t account for whether you’ll experience any interest rate changes.

You might decide, after taking advice from a mortgage broker, that your best route is an offset mortgage, for example, and therefore, it would be near impossible to calculate a precise figure, given that you can’t predict how much you’ll save in the future.

Variations of repayment mortgage agreements result in different outcomes, so explore your options with a mortgage broker and get a better understanding of the costs,  pros, and cons of each, based on your unique personal and financial circumstances.

FAQs about capital repayment mortgages

How much interest will I be charged for a capital repayment mortgage?

Interest rates vary between lenders but usually, if you present a higher risk of defaulting (missing repayments for your mortgage), you’ll be charged a more expensive rate of interest. That’s often because the lender would be taking on a greater level of risk by providing you with finance.

Having a good credit score, a low debt-to-income ratio, and a larger deposit, can all help to reduce the amount of interest you’re charged because these factors improve your affordability for a mortgage.

How much deposit do I need for a capital repayment mortgage?

Capital repayment mortgages are available with 5% deposits, though mortgages with higher loan-to-value ratios can be charged with higher rates of interest.

Usually having a larger deposit gives you a greater pool of capital mortgage repayment lenders to choose from, giving you greater flexibility with how you want to repay and under what terms and conditions.

If you have bad credit, a low credit score or issues surrounding your affordability like a recent decrease of work if you’re self employed, you may be asked for a larger deposit.

To find out how much deposit you’ll need for a repayment mortgage, ask a mortgage broker who can give you advice relating to your situation specifically, rather than general advice.&

What happens if I fall into negative equity with a capital repayment mortgage?

Having a larger deposit means owning more of the property upfront and some lenders prefer this because it means you’re potentially less likely to fall into negative equity.

For example, if you had a 95% LTV mortgage for £200,000, you would own £10,000 worth of equity. If house prices unexpectedly fell by 10%, your property’s market value could reduce to £180,000. You would still owe £190,000 though, so you would owe more money on your mortgage than your property was worth.

If for some reason, you could no longer repay your mortgage and had to sell up, the proceeds of the sale wouldn’t be enough to cover the whole debt and you would still owe the lender money.

Can I make overpayments on a capital repayment mortgage?

Paying off a lump sum or making larger repayments each month, reduces the size of the loan and therefore, the amount of interest you pay each month.

Many lenders will allow you to overpay by a specified percentage or amount each year but some mortgage lenders charge early repayment fees or overpayment fees, so savings gained by reducing your mortgage early need to be calculated against the cost of the applied fee if any.

Is a capital repayment mortgage the best type of mortgage?

Not necessarily as you may prefer an interest-only repayment mortgage for lower monthly payments.

If you have a savings account with a good interest rate or plan to make a profit of property by renovating it or benefiting from potential property price increases, then a capital repayment interest might not give you the freedom you’re looking for.

By repaying the capital and interest of a loan with a capital repayment mortgage however, you do reduce your overall mortgage debt and pay less interest overall.

If you’re unsure about which type of repayment mortgage would work best for you, ask a reviewed and trusted broker for their advice.