What this calculator does
Takes loan amount, interest rate, and term. Compares monthly payments, total cost, total interest paid, and equity position at the end of term for both a repayment mortgage and an interest-only mortgage.
The formula
Repayment mortgage monthly payment: M = P × [r(1+r)^n] / [(1+r)^n − 1] Where: P = loan amount r = monthly interest rate (annual rate / 12) n = total months (years × 12) Total repayable (repayment) = M × n Total interest (repayment) = Total repayable − P Equity at end of term = P (full loan repaid) Interest-only mortgage monthly payment: M_io = P × r (interest on the full loan only — no capital repaid) Total interest paid (interest-only) = M_io × n Capital still owed at end of term = P (no capital repaid) Total cost (interest-only) = interest paid + P Difference in monthly payment = M − M_io Extra total cost of interest-only vs repayment = (interest_only_total_cost) − (repayment_total_repayable)
Assumptions
- The interest rate is fixed for the full term — the comparison is not valid for variable rate scenarios without adjustment.
- No changes to repayment strategy during the term.
- For the interest-only mortgage, the full capital balance is repaid in a single lump sum at the end of the term via a separate repayment vehicle (for example, an investment portfolio, ISA, or property sale). The calculator does not model that vehicle's growth or risk.
- No offset or flexible mortgage features are modelled.
Data sources
No external regulatory data sources are used. This calculator applies a standard mortgage amortisation formula and a simple interest formula for the interest-only case.
Limitations
- Does not model the performance or risk of the capital repayment vehicle on an interest-only mortgage. If the vehicle (endowment, ISA, etc.) falls short, the borrower must make up the shortfall at the end of the term.
- Lenders impose strict eligibility criteria for interest-only mortgages — the calculator does not assess eligibility.
- Does not model remortgaging mid-term or switching between repayment types.
- The rate is assumed fixed. On a variable rate mortgage, monthly payments and total interest will differ.
- Does not account for the opportunity cost of the lower monthly payment on an interest-only mortgage — if the monthly saving is invested, the effective cost difference narrows.
Worked example
Inputs: £250,000 loan, 4.5% interest rate, 25-year term.
Repayment mortgage:
r = 4.5% / 12 = 0.375% = 0.00375
n = 25 × 12 = 300
M = £250,000 × [0.00375 × (1.00375)^300] / [(1.00375)^300 − 1]
= £250,000 × 0.005559
≈ £1,390/month
Total repayable: £1,390 × 300 = £416,944
Total interest: £416,944 − £250,000 = £166,944
Capital owed at end of term: £0
Interest-only mortgage:
M_io = £250,000 × 0.00375 = £938/month
Total interest over 25 years: £938 × 300 = £281,250
Capital still owed at end of term: £250,000
Total cost (interest + capital): £531,250
Monthly saving on interest-only vs repayment: £452/month
Extra total cost of interest-only: £531,250 − £416,944 = £114,306
Changelog
| Date | Change |
|---|---|
| May 2026 | Initial publication |