Guide · Mortgages & Property
UK Mortgages Explained: Repayment, Interest-Only, and Amortisation
Whether you are a first-time buyer or moving home, understanding how your mortgage is structured is the key to managing your largest monthly expense.
Repayment vs Interest-Only Mortgages
The most fundamental choice you make when taking out a mortgage is how you intend to pay it back. The vast majority of residential mortgages in the UK today are repayment mortgages (also known as capital and interest mortgages). With a repayment mortgage, your monthly payment is calculated so that you pay off all the interest and the entire capital borrowed over the mortgage term (e.g., 25 or 30 years).
With an interest-only mortgage, your monthly payments only cover the interest charged on the loan. Your payments will be significantly lower, but the original amount you borrowed does not decrease. At the end of the term, you must repay the entire capital lump sum, usually by selling the property or using an investment vehicle like an endowment or ISA.
How Amortisation Works (Why Early Payments Are Mostly Interest)
When you take out a repayment mortgage, you might assume that if you have a 25-year term, halfway through (at 12.5 years) you will have paid off half the house. This is a common misconception due to the way amortisation works.
Interest is calculated daily or monthly on your remaining balance. In the early years, your balance is huge, so a massive portion of your fixed monthly payment goes just to cover the interest, with a tiny sliver chipping away at the capital. As the balance slowly decreases, the interest charged decreases, meaning a larger portion of your payment goes towards the capital.
| Year | Monthly Payment | Interest Paid | Capital Repaid | Remaining Balance |
|---|---|---|---|---|
| 1 | £1,111 | £8,891 | £4,445 | £195,555 |
| 10 | £1,111 | £6,419 | £6,916 | £138,409 |
| 20 | £1,111 | £2,543 | £10,793 | £48,220 |
| 25 | £1,111 | £270 | £13,066 | £0 |
Note how in Year 1, you pay double in interest what you pay in capital. By Year 20, the ratio has completely flipped.
Fixed vs Variable Rates
UK mortgages typically offer an introductory deal period (usually 2, 3, or 5 years) before reverting to the lender's Standard Variable Rate (SVR).
- Fixed-Rate: Your interest rate and monthly payments are locked in for the deal period. This provides certainty for budgeting, regardless of what the Bank of England does.
- Tracker: Your interest rate tracks the Bank of England base rate (e.g., Base Rate + 1%). Your monthly payments can go up or down.
- Discounted Variable: A discount on the lender's SVR (e.g., SVR - 1.5%). Like a tracker, it can fluctuate, but it is tied to the lender's whim rather than the Bank of England directly.
Frequently asked questions
What is the difference between repayment and interest-only mortgages?
A repayment mortgage (capital and interest) pays off both the interest and a portion of the borrowed amount each month, guaranteeing the loan is cleared by the end of the term. An interest-only mortgage only covers the interest charges, meaning your monthly payments are lower, but you still owe the full original loan amount at the end of the term.
How does mortgage amortisation work?
Amortisation is the process of paying off debt over time in regular instalments. In the early years of a repayment mortgage, most of your monthly payment goes toward interest, with very little reducing the capital. In the later years, this flips, and the majority of your payment pays down the capital.
What is a standard variable rate (SVR)?
The SVR is a lender's default interest rate. You typically move onto this rate when your introductory fixed or tracker deal expires. The SVR is usually much higher than fixed rates, which is why borrowers often remortgage before their deal ends.
What happens if the Bank of England changes interest rates?
If you have a fixed-rate mortgage, your payments stay exactly the same until the fixed period ends. If you have a tracker mortgage, your rate and monthly payments will move up or down in line with the Bank of England base rate.