Ever wondered what the differences are between capital repayment and interest only mortgages are? Peter McGregor, Independent Mortgage and Protection Specialist, discusses the main differences in this article and examines whether interest only mortgages are suitable for buy-to-let properties.

Comely Bank houses

Most people need to borrow money when buying a home. This would usually be done with the assistance of a loan from a bank or building society. The loan is secured against the actual property and this is commonly known as a mortgage.

In order to make a profit, the lenders (banks/building societies) will charge interest on the loan amount, which the borrower will then pay back to the lender, usually on a monthly basis.

In addition to paying interest on the loan, the borrower also has to pay back the initial loan amount or capital, as it may be called. The way the capital is to be paid back will be determined at the start of the mortgage – it can generally be done in one of two ways, known as capital repayment mortgages and interest only mortgages.

What is a capital repayment mortgage?

With a capital repayment mortgage, the original loan amount is repaid gradually over the full term of the mortgage period. This would normally be done on a monthly basis and the borrower’s repayments to the lender will consist of both a capital repayment amount and an interest amount. The vast majority of domestic mortgages are repaid on this basis.

What is an interest only mortgage?

With an interest only mortgage, the lender will defer the repayment of the capital, usually until the end of the mortgage term. The borrower will typically make monthly payments consisting purely of interest, so the original debt remains outstanding.

The lenders have very specific criteria a borrower must meet before they will lend on an interest only mortgage. This will always include a much higher than usual deposit amount from the borrower and a bona fide repayment strategy/vehicle, such as a long term investment plan or perhaps the sale of another property.

As the repayment of the loan is not made until the end of the mortgage term if the chosen repayment vehicle(s) fail to produce the required amount to repay the mortgage the borrower is at risk of facing retirement with a very large mortgage debt with little or no prospect of repaying that debt without being forced to sell their home. This is a high risk repayment strategy.

Can I get an interest only buy-to-let mortgage?

Buy-to-let mortgages can usually be arranged on an interest only basis as they will always have a much higher deposit of typically around 25% and as it is not the borrower’s main residence, the future sale of that property can be acceptable as a repayment strategy.

ESPC Mortgages

As independent mortgage advisers, ESPC Mortgages can help with all aspects of understanding your budget, applying for a mortgage and dealing with the relevant insurance requirements. Pop in for a no obligation chat with Peter or one of the team at our Edinburgh Property Information Centre or contact them on FSEnquiries@espc.com or 0131 253 2920.

ESPC Lettings

If you’re interested in purchasing a buy-to-let property and looking for some advice, get in touch with the friendly team at ESPC Lettings on landlord@espc.com or 0131 253 2847.


The information contained in this article is provided in good faith. Whilst every care has been taken in the preparation of the information, no responsibility is accepted for any errors which, despite our precautions, it may contain. No individual mortgage advice is given, nor intended to be given in this article.

The initial consultation with an adviser is free and without obligation. Thereafter, ESPC Mortgages charges for mortgage advice are usually £350 (£295 for first time buyers). YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR OTHER LOANS SECURED AGAINST IT.