Mortgages.scot

There are two types of mortgage available in the UK, they are repayment or interest-only. For most, the former is the only option whilst the latter may be available to some.

Repayment

This is by far the most common type of mortgage. It is known by several names, the most common are repayment or capital and interest.

Each month, you make the mortgage payment, say £1,000. The first payment will be split £999 to the lender for the interest, and the remaining £1 will be used to pay part of the amount borrowed (capital). When the last payment eventually comes along £999 will be used to pay the capital, £1 will cover the interest.

The whole point here is that when the last payment is made the mortgage is also fully repaid, the lender releases their charge over the property and the borrower owns the property.

Interest-only

With interest-only the same mortgage payment of £1,000 will only ever cover the interest payments for the entire term of the mortgage. Unlike a repayment mortgage, the amount borrowed (capital) never decreases. If £200,000 is borrowed over a term of 25 years £200,000 will still be outstanding at the end of the 25-year term.

Why do this?

It's cheaper for a start. Take a £200,000 mortgage over 25 years and a 5% interest rate. On a repayment basis that would cost £1,169 per month. On an interest-only basis, it would cost £833 per month. A saving of £386 per month.

The downside

At some point, the £200,000 has to be repaid and there is a risk. The hope for most borrowers is that in 25 years they will sell the property. Over those 25 years, the expectation is that the property will be worth significantly more and the borrower can sell it, repay the lenders £200,000 and still have enough left over to buy a smaller property, retire, and have no mortgage. But it is a risk.

Many borrowers will intend to reduce the mortgage by choice over the term. For example, using bonuses from employment to reduce the amount owed.

Any lender offering an interest-only mortgage will have strict processes in place to ensure borrowers understand the risks involved. Many interest-only mortgages were given in the 80s and were not properly explained meaning many of those borrowers even in 2024 go to the end of the mortgage term and it wasn't worth enough to repay what they owed, nevermind buying something else.

Lifetime Mortgages

There is another type of mortgage that can be obtained, lifetime mortgages. These are available to older applicants and in the main are interest-only. There is too much to cover on those but I do have a post that gives these much more attention, view it here.