Mortgage guide · worked examples in GBP
Interest-only vs repayment: what happens to the balance?
The lower monthly payment on an interest-only mortgage comes with an unfinished job: repaying the original loan. Compare the balance as well as the payment.
The monthly difference
On a £200,000 balance at an illustrative 5% annual rate, interest-only payments are £833.33 per month in a monthly-interest model. A repayment loan over 25 years costs £1,169.18 per month. Repayment includes both the month’s interest and some of the principal.
The balance after 25 years
With interest-only payments and no capital repayments, £200,000 remains due at the end. A fully paid repayment schedule ends at zero. The monthly payment gap is not automatically a saving: the interest-only borrower still needs a credible way to repay the capital.
Compare the full cash requirement
At a constant 5% for all 25 years, the interest-only example incurs £250,000 interest and still requires the £200,000 principal, for £450,000 paid in total. The repayment example incurs £150,754.02 interest, for £350,754.02 total loan payments. These figures exclude fees, insurance, taxes and any cost or return associated with a separate repayment plan.
What a mixed mortgage does
A mixed mortgage repays part of the balance over time and leaves the interest-only portion due. For example, a 50% interest-only split on £200,000 leaves £100,000 to repay at the end if all scheduled payments are made and no extra capital is repaid. Different rates can apply to each portion.
Make the repayment plan explicit
Before comparing products, identify how the remaining balance would be repaid and what happens if that plan falls short. Product eligibility and the lender’s assessment are separate from this arithmetic. A repayment estimate does not constitute approval for an interest-only loan.