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Published 17 November 2023
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How Capital Repayment Mortgages Work

A capital repayment mortgage lets you pay back some of the capital you borrowed along with the interest you’re charged each month.

When you borrow to buy a home, a capital repayment mortgage is the option most commonly offered by lenders to pay that money back.  

What is a capital repayment mortgage?

The repayments that you make  with a capital repayment mortgage go towards paying the interest on your debt and repaying some of your original mortgage  amount, or capital, at the same time.  If you’re buying a property to live in and want a residential mortgage, most of the options available will be capital repayment mortgages. 

How does a repayment mortgage work? 

At the start of your capital repayment mortgage, your repayments will be made up of more interest than capital. But over time, as your debt shrinks and the interest accruing on it falls, this will shift and more of your monthly repayment will go towards paying off the capital.

Provided you make all your monthly repayments when you should, the original mortgage amount plus the interest you’ve been charged should be completely paid off by the end of your mortgage term. A typical mortgage term is often considered to be 25 years, but you may decide it should be shorter or longer, depending on what the lender allows.  

» MORE: Best mortgage lenders

Capital repayment mortgages vs interest-only mortgages

The main alternative to a capital repayment mortgage is an interest-only mortgage. With this type of mortgage you only pay back interest each month which means that at the end of the term you still need to repay the capital you borrowed.

The main upside of an interest-only mortgage is that monthly repayments are lower than with a repayment mortgage; the main downside is that you will always be paying interest on the full loan amount, and so will pay more overall compared to a repayment mortgage. A lender will also need evidence that you have a credible repayment strategy in place to repay the original capital you borrowed at the end of the mortgage term. This may be in the form of savings, investments, an endowment policy, pensions or a second property you’re willing to sell. 

Interest-only mortgages are far less widely available than capital repayment mortgages if you’re buying a home to live in and the eligibility criteria is usually more strict. You are likely to need a larger deposit and higher income than for a capital repayment mortgage.

However, interest-only mortgages are much more common in the buy-to-let market. This is because lenders are comfortable knowing you can sell the property to repay the mortgage at the end of the term.

» MORE: Do I need an interest-only or repayment mortgage?

What types of repayment mortgages are available?

There are various types of repayment mortgage, including:

  • Fixed-rate mortgage – where your mortgage rate is fixed for a certain period, usually two, five or 10 years.
  • Tracker mortgage – where your mortgage rate automatically tracks the Bank of England base rate, plus a fixed percentage.
  • Standard Variable Rate (SVR) mortgage – a mortgage that you automatically switch over to once your fixed rate deal ends, and where the interest rate is set by your lender.
  • Discount mortgage – where the mortgage rate follows the lender’s standard variable rate with a set percentage discounted.
  • Guarantor mortgage – where a relative or friend promises to repay the loan if you fail to do so.
  • Offset mortgage – where your savings are deducted from what you owe on your mortgage when the interest is calculated, to lower your monthly repayments.

» MORE: Current mortgage rates

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Dive even deeper

Should I get an interest-only or repayment mortgage?

Should I get an interest-only or repayment mortgage?

There are two ways interest can be charged on your loan. With an interest-only mortgage, your monthly payments only cover the interest charged on your loan. With a repayment mortgage, your monthly payments also go towards the initial sum you borrowed.

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How Much Can I Borrow for a Mortgage?

Get an instant estimate of how much you could borrow to buy a home using our mortgage calculator. Add your details below to get started, or read on to learn more about mortgage affordability.

How Much Do You Need for a House Deposit?

How Much Do You Need for a House Deposit?

How much deposit you need to buy a house will depend on your financial situation and the value of the property you want to buy. Having a larger deposit might help secure a lower mortgage rate, but a house deposit of 5% is often enough to help you onto the property ladder.

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