Interest-only or capital repayment on a buy-to-let?
What interest-only and capital repayment each do to your monthly cost, your cash flow and the balance left at the end, and which plan suits which method.
Updated on 8 August 2026
Short answer: what actually changes?
Interest-only pays the lender interest and nothing more. Capital repayment pays interest plus a slice of the balance. On a £161,250 loan at 5.79% over 25 years, that is £778 a month against £1,018. Same debt, same rate, two very different cash flows.
Interest-only monthly payment = £161,250 × 5.79% / 12 = £778 Capital repayment monthly payment over 25 years = £1,018
What each repayment method does to the balance
Interest-only leaves the balance untouched. You pay interest on the full £161,250 every month, for as long as the loan runs. At the end of the term you owe exactly what you borrowed. Clearing it is a separate plan: a sale, a remortgage, or cash set aside elsewhere.
Capital repayment splits every payment in two. One part covers that month's interest. The rest comes off the balance. In year one the interest slice is large and the capital slice is small. That ratio flips slowly as the balance falls.
Straight-line repayment is a third form. You repay a fixed amount of capital each month, so the payment starts high and falls every month after. It is standard in several European markets. In UK buy-to-let the live choice sits between interest-only and capital repayment, so this article stays there.
BRIX Calc supports five schedules: interest-only, capital repayment, straight-line, part interest-only and balloon. Balloon repays one large lump at the end, usually out of a sale. Part interest-only keeps a slice of the loan interest-only and repays the rest.
The property and the cash it takes
The property in this example is a two-bed flat in Leeds at £215,000, let at £1,150 a month. The mortgage is £161,250, or 75% loan to value. Everything else comes out of your own pocket on completion day.
| Item | Amount |
|---|---|
| Purchase price | £215,000 |
| Mortgage at 75% LTV | £161,250 |
| Deposit | £53,750 |
| Stamp duty, including the additional-dwelling surcharge | £12,550 |
| Legal fees and searches | £1,600 |
| Arrangement fee, paid up front | £1,750 |
| Survey | £600 |
| Works and furnishing before the first let | £3,500 |
| Total cash in | £73,750 |
In England and Northern Ireland an additional dwelling carries a stamp duty surcharge of 5% on top of the standard rates (HMRC, in force since 31 October 2024). Scotland and Wales run separate systems with their own surcharges.
Rent of £1,150 a month is £13,800 a year. Letting agent fees, insurance, the service charge, safety certificates and a repairs allowance take £3,150 of that. Net operating income is £10,650 a year, before any mortgage payment at all.
What each method costs each month
Payments on this £161,250 loan differ by £240 a month in year one. The rate is 5.79% in both cases and the term is 25 years in both cases. Only the schedule changes.
| Repayment method | Monthly payment, year 1 | Annual cost, year 1 |
|---|---|---|
| Interest-only | £778 | £9,336 |
| Capital repayment | £1,018 | £12,220 |
| Straight-line, for comparison | £1,316 in month 1 | £15,615 |
Inside that £1,018 capital repayment, £778 is interest in the first month and £240 comes off the balance. Over the first twelve months you repay £2,961 of capital. The balance closes year one at £158,289.
That £240 gap is not fixed for long. It is the capital slice, and the capital slice grows every month as the interest shrinks. By month 120 the same £1,018 payment splits into £592 of interest and £426 of capital. The payment never moved; the work it does did.
What it does to cash flow and return on equity
Cash flow is what the property leaves in your account once the mortgage is paid. Net operating income is £10,650 a year under both schedules. The mortgage takes £9,336 of it on interest-only and £12,220 on capital repayment.
Cash flow, interest-only = £10,650 − £9,336 = £1,314 a year Cash flow, capital repayment = £10,650 − £12,220 = −£1,570 a year
Return on equity divides your annual return by the cash you put in, here £73,750. The two schedules answer that sum differently. Capital repayment turns cash into equity rather than into money you can spend.
| Figure | Value | What it means |
|---|---|---|
| Cash flow, interest-only | £1,314 a year | £110 a month you can actually spend |
| Cash flow, capital repayment | −£1,570 a year | You top the account up by £131 a month |
| Return on equity, interest-only | 1.8% | Cash return on £73,750, with nothing repaid |
| Return on equity, capital repayment, cash only | −2.1% | Negative on cash alone |
| Return on equity, capital repayment, cash plus capital repaid | 1.9% | £2,961 of capital repaid outweighs the cash gap |
| Balance after 25 years, interest-only | £161,250 | The full loan is still owed on the last day |
Sensitivity says more than the headline. Drop the rent to £1,050 a month and net operating income falls to £9,450. Interest-only then leaves £114 for the year. Capital repayment leaves −£2,770, which is £231 a month out of your own pocket.
Does the repayment method change the ICR test?
The ICR test barely notices which repayment method you pick. Interest coverage ratio is rent divided by a notional monthly interest figure, and a UK buy-to-let lender sets that figure with a stress rate. Capital sits outside the sum, so both schedules score the same.
ICR = £1,150 / £739 = 1.56
That £739 is one month of interest on £161,250 at a 5.5% stress rate. An ICR of 1.56, or 156%, clears a 145% requirement with room to spare. Capital repayment passes the identical test while running at −£131 a month.
Stress rates and ICR requirements vary by lender, by fix length and by your tax status. The 5.5% and the 145% used here are an indication, not a benchmark. Work back from the test to the rent you need in minimum rent your lender needs, or use the ICR calculator.
What is left at the end of the term
The balance at the end of the term is where the two schedules part company for good. Capital repayment reaches zero after 25 years. Interest-only still stands at £161,250 on that same day, and the loan does not clear itself.
Few landlords stay on one loan for 25 years. Most remortgage every two to five years, so the balance matters at each of those moments instead. A flat balance against a flat valuation pushes your LTV the wrong way, and a higher LTV usually buys a higher rate.
Take the first five-year fix. Capital repayment costs £14,420 more in payments across those five years. It cuts the balance from £161,250 to £144,576, a fall of £16,674. You buy £16,674 of equity with £14,420 of cash, because the interest bill shrinks as the balance does.
Year ten shows the same trade on a larger scale. The capital repayment balance is down to £122,319, while interest-only still reads £161,250. Against an unchanged £215,000 valuation that is 57% LTV against 75%. Reaching it cost £28,833 of extra payments over the decade.
Interest-only asks a harder question of you. Something has to clear £161,250 at the end: a sale, a refinance, or savings built outside the property. Write that plan down at the start, with a date on it. A rent stress test shows whether the plan survives a rate rise.
Which method fits which plan?
| Your plan | Method that usually fits | Why |
|---|---|---|
| Hold three to seven years, then sell | Interest-only | The sale clears the loan, so slow repayment adds little |
| Buy and hold long term, cash flow is comfortable | Capital repayment | The balance falls, and LTV improves at every remortgage |
| Cash flow is tight, rent is uncertain | Interest-only | Lowest payment, most room for voids and repairs |
| You want the lowest total interest over the term | Capital repayment | A shrinking balance means less interest charged |
These are indications drawn from how the two schedules behave, not a rule. The honest question is whether you steer on cash this year or on a balance in fifteen years.
Two mistakes that distort the comparison
Reading the interest-only surplus as profit. The £1,314 a year is cash, and cash is useful. It is not a measure of how the investment performed. Nothing was repaid, so the debt sits exactly where it started. Compare cash flow plus capital repaid against cash flow alone.
Comparing total interest over 25 years. Capital repayment charges less interest in total. That is arithmetic, not insight. The total says nothing about whether you can carry the payment in year one. A lender tests year one, and so does your account.
Both mistakes share a shape. You fix on one number, either the surplus today or the interest across the whole term, and the rest of the schedule quietly disappears. Set year one and year twenty-five beside each other before you commit.
Run your own numbers
Put your own price, rent and rate into BRIX Calc and switch between the schedules. It shows cash flow, ICR and return on equity for each year of the term, and it lets each financing part run its own schedule. One project is free, and PRO lifts the cap on how many you keep. It calculates projects: it gives no tax advice and fetches no market data. Start with the rental calculator. If the question is whether to keep the property at all, rent or sell after a renovation puts both outcomes side by side.
Frequently asked questions
Can I switch from interest-only to capital repayment later?
Often yes, though it depends on your mortgage terms rather than on any calculator. Ask your lender what a switch costs and whether it triggers a fresh affordability check. In BRIX Calc you model the switch as a new financing part from that month, with the remaining balance as its principal.
Why is interest-only so common in UK buy-to-let?
Cash flow, mainly. Interest-only holds the monthly payment at its lowest, which leaves room for voids, repairs and rate rises. Landlords who expect to sell or remortgage within a decade gain little from repaying capital slowly. The balance then becomes a question for the exit, not for the month.
Does capital repayment improve my ICR?
Not on a standard UK buy-to-let test. Lenders divide rent by a notional interest figure at a stress rate, so the capital element sits outside the sum. Repaying capital does shrink the balance, and a smaller balance lowers the notional interest at your next remortgage.
Which schedule does BRIX Calc use by default?
That depends on the calculator. Rental projects default to capital repayment on an annuity schedule. Transformation projects default to interest-only, because the sale clears the loan in one go. You can override either default, and each financing part of a project can carry its own schedule.