What is the difference between a repayment mortgage and an interest-only mortgage?

What is the difference between a repayment mortgage and an interest-only mortgage?

• A. Repayment repays only interest; principal is due at end.
• B. Interest-only repays both principal and interest.
• C. Repayment repays principal only.
• D. Repayment repays capital and interest; interest-only repays only interest with capital due at end.

Answer: (D)

The central idea is how the monthly payments are split between repaying the loan amount (the principal) and paying interest, and how that affects the loan balance over the term. In a repayment mortgage, each payment includes both interest and a portion of the loan principal. With every payment, part goes to interest and part reduces the outstanding loan, so by the end of the term the balance is zero. In an interest-only mortgage, you pay only the interest each period. The loan principal stays the same throughout the term, so you don’t reduce the amount borrowed. At the end of the term you must repay the full principal in one lump sum (or via another arrangement). That distinction—principal and interest being paid down over time in a repayment mortgage, versus only interest being paid with the principal due at the end in an interest-only mortgage—is what separates the two and is why the described difference is correct.

The central idea is how the monthly payments are split between repaying the loan amount (the principal) and paying interest, and how that affects the loan balance over the term.

In a repayment mortgage, each payment includes both interest and a portion of the loan principal. With every payment, part goes to interest and part reduces the outstanding loan, so by the end of the term the balance is zero.

In an interest-only mortgage, you pay only the interest each period. The loan principal stays the same throughout the term, so you don’t reduce the amount borrowed. At the end of the term you must repay the full principal in one lump sum (or via another arrangement).

That distinction—principal and interest being paid down over time in a repayment mortgage, versus only interest being paid with the principal due at the end in an interest-only mortgage—is what separates the two and is why the described difference is correct.