Glossary · UK
What is Repayment Mortgage?
A mortgage where each monthly payment covers both interest and a slice of the capital borrowed, so the loan is fully paid off by the end of the agreed term.
Full Definition
A repayment mortgage (also called a capital and interest mortgage) is structured so that every monthly payment is made up of two parts: interest on the outstanding balance, and a portion of the original capital borrowed. Payments are calculated so that, provided the borrower keeps paying on schedule, the balance is reduced to zero by the end of the agreed mortgage term -- most commonly 25 years, though shorter and increasingly longer terms (30 to 40 years) are used to keep monthly payments affordable. Because more of each early payment goes toward interest (which is charged on the full outstanding balance) and progressively more goes toward capital as the balance falls, the split between interest and capital shifts steadily over the life of the mortgage even though the total monthly payment on a fixed rate typically stays level. Repayment mortgages are the default, and in practice near-universal, choice for owner-occupied residential mortgages in the UK because they guarantee the property is owned outright at the end of the term, in contrast to interest-only mortgages, which leave the full capital sum still owing unless a separate repayment vehicle has been built up.