Loan calculator
Calculate and compare repayment and interest-only loans. View monthly payments, total interest costs, and potential savings.
Loan Details
Annuity Loan
Fixed monthly payments throughout the loan period. The proportion of interest and principal changes over time.
First and Last Payments:
Serial Loan
Fixed principal repayment each month, but decreasing interest. Monthly payments reduce over time.
First and Last Payments:
Comparison
You save - in interest costs with a serial loan compared to an annuity loan.
Need help with your company’s accounts? Try our accounting system reai.no . Try it free now
The Difference Between Repayment and Interest-Only Loans
When taking out a loan, it’s important to understand the difference between the two most common loan structures: repayment loans and interest-only loans.
Repayment Loan (Capital and Interest)
With a repayment loan, you pay the same amount every month throughout the loan term. Each monthly payment consists of both principal and interest, but the ratio changes over time:
- At the start: High interest portion, low principal portion
- Over time: Interest portion decreases, principal portion increases
- At the end: Low interest portion, high principal portion
Advantages: Predictable finances with a fixed monthly cost. Easier to budget. Guaranteed to repay the loan by the end of the term.
Disadvantages: Higher monthly payments compared to interest-only.
Interest-Only Loan
With an interest-only loan, you pay only the interest each month and repay the capital at the end of the term (or through a repayment vehicle):
- Monthly payment: Interest only – lower than repayment
- Capital: Must be repaid at the end of the term
- Risk: You need a plan to repay the capital (e.g. savings, investments, property sale)
Advantages: Lower monthly payments during the loan term.
Disadvantages: Higher total interest cost. Capital balance does not reduce. Repayment risk at end of term.
Formulas
Repayment Loan
Monthly payment is calculated using the following formula:
Payment = Loan Amount × (r × (1 + r)^n) / ((1 + r)^n - 1)
Where:
- r = monthly interest rate (annual rate / 12 / 100)
- n = number of months (years × 12)
Interest-Only Loan
The calculation is simpler:
- Monthly Interest: Loan Amount × monthly interest rate
- Capital repayment at end: Full loan amount due at maturity
Which Loan Should You Choose?
Choose a repayment loan if:
- You want predictable finances with a fixed monthly cost
- You want the certainty of owning your property outright at the end
- You prefer simple budgeting with no end-of-term lump sum
Choose an interest-only loan if:
- You have a clear repayment plan for the capital
- You want lower monthly payments in the short term
- You are a buy-to-let investor or have investment-backed repayment
- You expect to sell the property before the term ends
Example
For a mortgage of £300,000 with 4.5% interest over 25 years:
Repayment Loan:
- Fixed monthly payment: approx. £1,668
- Total repaid: approx. £500,370
- Total interest cost: approx. £200,370
Interest-Only Loan:
- Monthly payment: approx. £1,125
- Total interest paid: approx. £337,500
- Capital still owed at end: £300,000
- Total cost: approx. £637,500
Other Factors to Consider
- Interest rate type: Fixed rates give certainty; variable (tracker) rates can change with the Bank of England base rate
- Fees: Arrangement fees, valuation fees, and early repayment charges vary between lenders
- Mortgage interest relief: Not available for residential mortgages, but landlords can claim a 20% tax credit on mortgage interest
- Flexibility: Options for overpayments, payment holidays, or remortgaging