Interest-only
The regular payment covers interest but does not normally reduce the amount borrowed. On a £150,000 mortgage at 5%, annual interest is approximately £7,500 before fees or rate changes. If the property is sold while the balance is still £150,000, that amount must be repaid from sale proceeds.
Repayment
Each scheduled payment contains interest and principal. The cash payment is higher than interest-only at the same rate, but the mortgage balance declines over time. At sale, less debt remains to be repaid, all else equal.
| Issue | Interest-only | Repayment |
|---|---|---|
| Annual cash requirement | Usually lower | Usually higher |
| Mortgage balance | Normally unchanged | Declines with scheduled principal |
| Equity building | Depends mainly on value and extra payments | Also supported by principal repayment |
| Exit | Original balance usually remains | Remaining balance is lower |
| Repayment risk | A separate repayment plan is essential | Built into scheduled payments if maintained |
Model rate changes rather than one fixed rate
A 25-year mortgage does not mean the interest rate will be fixed for 25 years. Model the expected fixed period and then a realistic refinancing assumption. Also test a higher rate. On a £150,000 interest-only loan, each one percentage point adds £1,500 of annual interest.
Remember tax and fees
For an individual residential landlord, mortgage interest is not treated in the same way as an ordinary deductible operating expense; the tax rules include a finance-cost tax reduction and depend on circumstances. Mortgage product fees, valuation fees and early repayment charges may also affect the result. See current HMRC finance-cost guidance.
Which is better?
Neither structure is automatically superior. The appropriate comparison is the complete cash-flow profile, tax treatment, mortgage balance at exit, refinancing risk and what you do with any cash saved under interest-only. Obtain regulated mortgage advice for your circumstances.
MoneyHelper also explains that an interest-only borrower needs a credible plan to repay the capital at the end of the term. See its interest-only repayment guidance.
Compare both mortgage types