What Is A Capital Repayment Mortgage?

 A capital repayment mortgage is an arrangement where your monthly repayment includes the interest and a part of the capital borrowed. It is the most common mortgage type borrowers choose in the UK.

When the mortgage term ends (ideally in 25 to 35 years in the UK), you fully repay your mortgage and own your property outright. More than 90% of residential borrowers in the UK choose this mortgage as it guarantees debt-free ownership.

If you are still wondering, "What is a capital repayment mortgage?" our mortgage experts in Harrow have created this quick guide to help you understand how it works and choose the right mortgage for your needs.


 

How does a capital repayment mortgage work?

In this arrangement, every payment you make has two parts: the interest and the capital.

During the initial years, the interest takes up a large chunk of your payment. Over time, your total mortgage balance (capital) will reduce. This is when a larger portion of your repayment will include the capital balance. This trend is called the amortisation curve.

Let us understand this with a working example.

Suppose you have taken a £200,000 mortgage at 4.5% for 25 years. Your monthly mortgage payment is £1,110.

In the first year, £750 from your repayment will go toward the interest, while £360 is used to repay the capital.

However, as you reach the final year, the ratio will flip. £1,070 will go toward the capital, and only £40 will be used as the interest payment.

 

Capital repayment vs. interest-only mortgages

The most common alternative for UK homebuyers after a capital repayment mortgage is an interest-only mortgage.

The table below summarises the two options:

Feature

Capital Repayment

Interest-Only

Monthly payment

Higher

Lower

What you pay back each month

Capital + interest

Interest only

Property owned at the end of the term?

Yes

No (loan still owed)

Risk level

Low

Higher (needs repayment vehicle)

Most common use

Residential mortgages

Buy-to-let, high-net-worth

 

Based on your circumstances and preferences, you can also choose a part-and-part mortgage. This arrangement combines both interest-only and capital repayment mortgages.

 

Benefits and drawbacks of a capital repayment mortgage

A capital repayment mortgage offers you these key benefits:

·      A guarantee to own your home at the term’s end.

·      No need for a separate repayment vehicle (investments, pensions, ISAs, etc.)

·      Lower lifetime interest costs than an interest-only mortgage.

·      Overpayments (if allowed by the lender) can significantly reduce your total interest.

A few drawbacks of a capital repayment mortgage include:

·      Higher monthly repayments than interest-only deals.

·      Low monthly cash flow flexibility.

·      Slow equity growth during the initial years.

 

Who is a capital repayment mortgage suitable for?

A capital repayment mortgage is best suited for you if:

·      You are a first-time buyer or home mover looking for certainty.

·      You want guaranteed ownership by the end of the term.

·      You do not have an effective plan to repay the capital separately.

This mortgage is less suitable for you if:

·      You are a buy-to-let landlord with a rental strategy.

·      You are a high-net-worth borrower with dedicated investment vehicles.

 

It isn’t always easy to choose between a capital repayment mortgage and an interest-only deal. Work with a fee free mortgage broker like MariannaFS to compare all available options and make an informed choice.

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