When I first looked into mortgages, the terminology felt deliberately confusing. Annuity loan, repayment loan, amortisation schedule — it all sounded like something you needed a degree to understand. You don't. Once you see the numbers month by month, it clicks.
The Annuity Loan: Fixed Monthly Payment
With an annuity loan, you pay exactly the same monthly payment throughout the entire term. This payment consists of an interest component and a repayment component. Over time, the interest component falls (because the outstanding balance decreases) and the repayment component rises, but the total payment stays constant.
Annuity loan: £300,000 / 3.8% / 25 years
Monthly payment: £1,551 (unchanged throughout)
Month 1: Interest £950 | Repayment £593
Final month: Interest ~£5 | Repayment ~£1,538
Total interest over 25 years: approx. £165,000
The Repayment Loan: Fixed Repayment, Falling Payment
With a repayment loan, the repayment amount stays constant, for example, £1,000/month. However, the interest charges fall with each payment because the outstanding balance decreases. The total monthly payment therefore falls over time.
Repayment loan: £300,000 / 3.8% / 25 years
Repayment: constant £1,000/month
Month 1 payment: £1,950 (£1,000 repayment + £950 interest)
After 10 years: ~£1,580/month
After 20 years: ~£1,190/month
Total interest: approx. £144,375, ~£18,500 less than annuity loan
Which Is Cheaper Overall?
The repayment loan is cheaper overall, because the regular fixed repayment reduces the outstanding balance faster, resulting in less interest. The disadvantage: the initial payment is higher and changes every month, making budgeting more complex.
When Does Each Option Make Sense?
- Annuity loan: When you want maximum certainty and prefer a fixed monthly commitment. Ideal for most homebuyers and owner-occupiers.
- Repayment loan: When your income is high and stable enough to handle the larger initial payment. Saves meaningful interest over time. Often preferred by property investors.
- Interest-only loan: Pay only interest during the term, repay the full capital at the end. Can be tax-efficient for investors who can offset interest costs, but expensive overall.
Overpayments: How Much Do They Save?
Most annuity mortgages allow annual overpayments of 5–10% of the loan amount. An annual overpayment of £5,000 on a £300,000 mortgage at 3.8% over 25 years can reduce the term to around 19 years and save approximately £40,000 in total interest.
Calculate Your Amortisation Schedule
With the free Loan Calculator by Zinsora, you can calculate a full amortisation schedule for all three loan types, including overpayments. See year by year how interest, repayment and outstanding balance develop.