FAQ 012 | What Is the Difference Between an Interest-Only and aRepayment Mortgage? (2026 edition)

Author: SJW Research & Intelligence

Brand: SJW UK Properties

Section: SJW Research & Intelligence | UK Property Knowledge Base

Q: What is the difference between an interest-only mortgage and a repayment mortgage?

With an interest-only mortgage, the monthly payment covers the interest alone, and the capital balance does not reduce as payments are made. With a repayment mortgage, each monthly payment covers both interest and part of the capital, so that the balance is normally cleared in full by the end of the term.

Why do many UK investors choose interest-only?

For an investment property, interest-only generally lowers the monthly payment, improves cash flow and preserves greater flexibility for a future sale or remortgage. The capital, however, still has to be repaid in due course, whether through a sale, a remortgage or another arrangement.

Is interest-only always the better option?

Not necessarily. Whether it suits you depends on the purpose of the purchase, your cash flow requirements, how long you intend to hold the property and your long-term asset allocation. It cannot be judged on the size of the monthly payment alone.

If you choose interest-only, pay particular attention to the overpayment allowance

Most mortgage offers set out an overpayment allowance: the proportion of the outstanding capital a borrower may repay in each mortgage year without incurring an early repayment charge (ERC). Many products in the UK market currently allow up to around 10% of the capital to be repaid each year, although the terms vary between lenders and between products, and the mortgage offer is the authoritative source. As an example, on a loan of £500,000 with a 10% annual overpayment allowance, up to £50,000 of capital could normally be repaid each year without an early repayment charge. For clients on an interest-only mortgage, this is a term well worth understanding. Used sensibly, the overpayment allowance makes it possible to keep monthly payments low while gradually reducing the capital as cash flow permits, which in turn creates more flexibility on a future sale or remortgage.

SJW Research & Intelligence analysis

When a mortgage offer arrives, we encourage clients to look beyond the interest rate and the

monthly payment and to read the key terms of the agreement carefully, including the overpayment allowance, the early repayment charge, the fixed-rate period and the repayment method, whether interest-only or capital repayment. Each of these terms will shape your finances for years to come.

An SJW reminder

Neither interest-only nor repayment is inherently better. The right choice depends on your asset allocation, your cash flow, your investment objectives and how long you intend to hold, and should be made with advice from a licensed UK mortgage adviser.

Last updated: July 2026

Professional statement: This article has been prepared by SJW Research & Intelligence for general information only. It does not constitute mortgage, financial, tax or investment advice. SJW UK Properties is not a licensed mortgage adviser. Any specific mortgage recommendation should come from a licensed UK mortgage adviser, based on the client’s actual circumstances, and is subject to the lender’s final decision.