What is a repayment mortgage?

How repayment mortgages work

A repayment mortgage spreads the cost of your loan over an agreed term, usually 25 years or more. You make monthly payments that cover two parts:

• Capital – the actual amount you borrowed to buy your home. As you make your monthly payments, a portion goes directly towards repaying this balance. In the early years, this part can be relatively small. As your mortgage progresses, more of each payment starts chipping away at the capital, helping you steadily build equity.

• Interest - the cost you pay to borrow money from your lender. At the beginning of your mortgage, interest makes up the largest share of your monthly payment. This is because interest is calculated on your remaining loan balance, which is highest at the start. As your capital decreases, so does the interest you pay.

In the early years, a larger share of your payment goes toward interest. As time goes on, more of each payment contributes to reducing the capital, meaning your outstanding balance gradually decreases.

By the end of the mortgage term, if all payments have been made, you’ll have fully repaid the loan and interest and you’ll own your home outright.

Wondering how much you could borrow? Read our mortgage affordability guide for more information.

What checks lenders carry out

When you apply for a mortgage, lenders complete a process called underwriting. This involves looking into your overall financial situation, including your income and credit history, to gauge the risk in lending to you.

Credit checks and affordability tests

Lenders usually combine credit checks with an affordability review to gain a clearer understanding of your finances:

• Soft credit check (preapplication / Agreement in Principle). A look at your credit history to gauge eligibility. This isn’t visible to other lenders and usually doesn’t impact your credit score.

• Hard credit check (full application). A full search recorded on your file when you proceed with your mortgage application. This is visible to other lenders and may affect your credit score if several hard checks take place in a short period of time. For more information about credit scores, read our credit score tips.

• Loan-to-income (LTI) ratio. How much you want to borrow versus your income.

• Income verification. Payslips, bank statements or tax returns to confirm what you earn.

• Existing commitments. Loans, credit cards, car finance and other repayments.

• Spending patterns. Regular outgoings like bills, subscriptions and childcare.

• Overall affordability. Can you comfortably cover repayments now and over time?

Risk assessment and stress testing

Lenders may also assess how well you could manage your mortgage if circumstances change.

They’ll typically apply stress tests, which check whether you could still afford repayments if interest rates rise or your financial situation changes. Lenders also use risk modelling to see how your credit history, income stability and overall affordability fit with their latest lending criteria.

These checks help tell you how likely the mortgage is to remain affordable for you throughout the whole term.

How employment types affect your mortgage application

Your employment type can influence how lenders assess your income and the documents they ask for. Whether you’re employed, self-employed or an independent contractor, lenders look for evidence that suggests your earnings are stable, consistent and reliable enough to support the mortgage.

Employed applicants

For employed applicants, lenders verify income using PAYE documents. They’ll typically look at:

• Basic salary. The main figure used to assess affordability

• Bonuses and commission. Usually averaged over the last 3 to 12 months, depending on your lender

• Overtime. May be considered if it’s regular and supported by payslips

• Employment stability. Verified through recent payslips and sometimes an employer reference

Self-employed and contractors

For self-employed applicants and contractors, lenders usually require a clearer picture of long-term earnings. They’ll typically ask for:

• Income overview and tax calculations via a SA302 form

• Full tax returns (usually the previous1 to 2 years, depending on the lender)

• Business accounts if you operate as a limited company

• Bank statements to show trading activity

For contractors, many lenders calculate income using your day rate, often multiplying it by the number of days per week you work and the contracted working weeks in a year.

Advantages and disadvantages of repayment mortgages

There are both potential advantages and disadvantages to repayment mortgages.

*Equity refers to the difference between the property value and the outstanding mortgage balance. 

Repayment mortgage example

We’ve provided an example of a remortgage payment below, but please note that actual mortgage costs and monthly payments can vary depending on your circumstances, interest rates and lender criteria:

• Amount borrowed: £150,000

• Mortgage term: 25 years

• Interest rate: 5%

• Approximate monthly payment: £877

At the start of the mortgage, most of your monthly payment covers interest because your loan balance is still high. Only a small portion reduces the capital. Over time, as the balance decreases, the interest you’re charged each month also drops. This means a bigger share of each payment is used to pay down the loan itself.

Alternatives to repayment mortgages

While repayment mortgages are a common option, there are alternatives that work differently depending on your financial goals and how you plan to manage the loan over time:

• Interest-only mortgages. With an interest-only mortgage, your monthly payments cover just the interest. This keeps your payments lower, but you’ll still owe the full loan amount at the end of the term.

• Part and part mortgages. A part and part mortgage combines the repayment and interest-only approaches. You repay some of the loan each month (like a repayment mortgage), while the remaining portion is interest-only. This reduces monthly costs compared to full repayment, but you’ll still have a lump sum to pay off at the end of the term.

If you’re considering buying a home, you can explore our range of new build homes across the UK. We also have various schemes and offers, though terms and conditions apply.

Contact our Sales Advisers today to for more information.

Disclaimer:

This article is for general informational purposes only and does not constitute mortgage advice. We would always recommend that advice is taken from a regulated mortgage adviser regarding your specific circumstances.