Your interest only mortgage

What is an interest only mortgage?

An interest only mortgage is where your monthly payments only cover the interest, while the amount you originally borrowed remains outstanding.

Unlike a repayment mortgage, your monthly payments don’t reduce the mortgage balance. If you borrow £250,000, you'll still owe £250,000 at the end of the mortgage term unless you've made separate arrangements to reduce the debt.

Because the capital remains unpaid throughout the term, lenders normally need you to have a repayment strategy in place before they’ll approve your application. Some strategies could include using investments or savings, pension pots, or selling the property when the mortgage term ends.

How do interest only mortgages work?

Let's assume:

• Mortgage amount: £250,000
• Mortgage term: 25 years
• Interest rate: 5%

With a repayment mortgage, your monthly payment would cover both interest and part of the loan balance.

With an interest only mortgage, the payments only cover the interest charged. While this reduces monthly costs, the mortgage balance would remain at £250,000 throughout the term and would need to be repaid at the end.

For example, on a £250,000 mortgage over 25 years with a 5% interest rate, a repayment mortgage would cost around £1,462 per month. After 10 years, the mortgage balance would have fallen to around £188,000. By contrast, an interest only mortgage would cost around £1,042 per month, but you'd still owe the full £250,000 after 10 years and at the end of the mortgage term.

It’s absolutely imperative that you have a repayment strategy to pay the loan back. Without one, you could be forced to sell you home to pay off the remaining balance.

Common mortgage terms explained

Capital

The capital is the amount of money the lender lends you as a mortgage. It’s what you borrowed from the lender.  

For example, if you take out a mortgage for £300,000, On a repayment mortgage, this balance reduces over time, while on an interest only mortgage it remains unchanged and you would still owe £300,000 when the mortgage term ends[ML2.1]

Interest

Interest is the cost of borrowing money from a lender. Mortgage lenders charge interest as a percentage of the amount you owe.  

Equity

Equity is the portion of a property you own outright.

If your home is worth £400,000 and you still owe £250,000 on your mortgage, you have £150,000 of equity.

Loan-to-value (LTV)

Loan-to-value, often called LTV, measures how much you're borrowing compared with the property's value.

For example, borrowing £300,000 on a £400,000 property would result in a 75% LTV, because you’re borrowing 75% of the property price.

Repayment vehicle

A repayment vehicle is what you'll use to repay the mortgage at the end of an interest only term.

These could include investments, pensions, savings, or property sales.

Interest only vs repayment mortgages

The main difference between an interest only mortgage and a repayment mortgage is that a repayment mortgage gradually reduces your debt, while an interest only mortgage does not.

With a repayment mortgage, every monthly payment includes both interest and a portion of the amount borrowed. By the end of the term, the mortgage should be fully repaid.

With an interest only mortgage, monthly payments only cover interest.

Which is better will come down to your individual circumstances.

A repayment mortgage provides certainty because you're steadily reducing your debt. An interest only mortgage may suit borrowers with substantial assets, long-term investment plans, or a reliable repayment strategy.  

Interest only vs part-and-part mortgages

A part-and-part mortgage combines repayment and interest only borrowing within the same mortgage.

Part of the loan is repaid each month, while the remaining balance stays on an interest only basis. This can provide a compromise between lower monthly payments and reducing debt over time.

This could be an option if you’d like greater flexibility but still want to gradually reduce part of the mortgage balance.

Interest only vs Retirement Interest Only (RIO) mortgages

A standard interest only mortgage and a Retirement Interest Only (RIO) mortgage work differently despite their similar names.

A traditional interest only mortgage has an end date when the balance has to be repaid. A RIO mortgage is designed for older borrowers and is usually repaid when they die or move into long-term care.

RIO mortgages can allow homeowners to remain in their property for longer while keeping monthly payments manageable.

Who can get an interest only mortgage?

Interest only mortgages are typically available to people who can demonstrate a strong financial position and a realistic plan for repaying the balance.

Lenders usually look for a combination of income, assets, equity and evidence that the mortgage can be repaid in full at the end of the term. The exact requirements vary between lenders.

Although interest only mortgages remain available, eligibility checks are often stricter than they are for standard repayment mortgages.

Typical lender requirements

Income

Many lenders expect borrowers to demonstrate a stable and sustainable income.

Some lenders may require applicants to meet minimum income thresholds, particularly for larger residential interest only mortgages.

Deposit

Interest only mortgages often require a larger deposit than repayment mortgages.

A higher deposit reduces the lender's risk and can mean there are more mortgage rates available.

Credit history

A strong credit profile can improve your chances of approval.

Lenders will usually assess your history of borrowing and repayment before making a decision.

Property value

Some lenders set minimum property value requirements, particularly for larger loans.

Age

Most lenders consider your age both now and at the end of the mortgage term.

This helps them assess affordability and retirement planning.

Self employed borrowers

Self employed applicants can still obtain interest only mortgages.

Lenders will usually ask for evidence of stable income and may request accounts or tax calculations covering recent years.

First time buyers

Some lenders accept first time buyers for interest only mortgages, although available options may be more limited than for experienced homeowners.

What deposit do you need for an interest only mortgage?

Most lenders require a larger deposit for an interest only mortgage than they would for a repayment mortgage.

You’ll generally need at least 25% equity or 25% deposit, although individual lender criteria will be different. Larger deposits can improve eligibility and often provide access to more competitive mortgage rates.

The amount required will depend on factors such as the type of property, loan size and your wider financial circumstances.

Why are interest only mortgages harder to get?

Interest only mortgages are generally harder to obtain because lenders consider them higher risk than repayment mortgages.

The key difference is that the debt is not reduced during the mortgage term. If a repayment strategy doesn’t work out or your circumstances change, there’s a greater chance you might struggle to repay the balance.

To manage this risk, lenders often apply stricter affordability assessments and require stronger evidence of income, assets and future repayment plans.

What is a repayment strategy?

A repayment strategy is the plan you'll use to repay the mortgage balance at the end of the mortgage term.

Lenders want confidence that your chosen strategy will generate enough money to clear the outstanding debt. Without a credible repayment plan, obtaining an interest only mortgage can be difficult.

Regularly reviewing your strategy is just as important as choosing one. Financial markets, pensions and personal circumstances can all change over time.

What lenders may accept as a repayment strategy?

Most lenders accept repayment strategies that have the potential to generate sufficient funds to clear the mortgage balance.

Common examples include:

• Stocks and Shares ISAs
• Pension lump sums
• Investment portfolios
• Savings plans
• Business assets
• Downsizing or the sale of another property

Every lender has its own criteria and may ask for evidence that you have the funds to clear the debt throughout the mortgage term.

What happens at the end of an interest only mortgage?

At the end of an interest only mortgage, you'll need to repay the full amount originally borrowed.     

Many borrowers do this using savings, investments, pension funds or proceeds from selling a property. If you've maintained a suitable repayment strategy throughout the mortgage term, repayment should be planned well in advance.

If you believe there may be a shortfall, speaking to your lender early can help you explore alternatives such as remortgaging, switching repayment methods or extending the mortgage term.

Advantages of an interest only mortgage

The main advantage of an interest only mortgage is that monthly payments are usually lower than with a repayment mortgage.

This can improve affordability and give borrowers more freedom to save, invest or pursue other financial goals. For some people, this flexibility is a major benefit.

Interest only mortgages can also support specific financial planning strategies and remain popular in the Buy-to-Let market.

Disadvantages of an interest only mortgage

The biggest disadvantage of an interest only mortgage is that the capital remains outstanding throughout the mortgage term.

Although monthly payments are lower, you're not reducing the debt. This creates ongoing repayment risk and places greater importance on your repayment strategy.

There is also the possibility that investments or savings may not perform as expected, leaving a shortfall when the mortgage term ends.

When might an interest only mortgage not be suitable?

An interest only mortgage may not be suitable if you don't have a realistic and achievable plan for repaying the balance.

Borrowers who prefer certainty, have limited assets or would struggle with investment risk may feel more comfortable with a repayment mortgage.

It is also important not to rely solely on future house price growth, as property values can rise and fall over time.

Can you switch from an interest only mortgage to a repayment mortgage?

Yes, many borrowers can switch from an interest only mortgage to a repayment mortgage during the mortgage term.

Doing so allows future payments to reduce the mortgage balance and can provide greater certainty that the debt will be repaid by the end of the term.  

Before approving the switch, lenders will usually reassess affordability because monthly payments are typically higher on a repayment basis.

Can you remortgage an interest only mortgage?

Yes.

Remortgaging can help secure a new rate, extend the term, switch repayment methods or adapt borrowing arrangements following a change in circumstances.

As with any mortgage application, lenders will assess affordability, creditworthiness and eligibility before approving a new deal.

Interest only mortgages for Buy-to-Let landlords

Buy-to-Let landlords because they can reduce monthly borrowing costs.

Lower repayments may improve cash flow and make it easier for rental income to cover mortgage costs. This can help landlords manage their cash flow and potentially grow their property portfolios.

However, the mortgage balance will still need to be repaid, often through property sales, refinancing or wider investment assets.

Retirement Interest only (RIO) mortgages

A Retirement Interest Only mortgage is a specialist mortgage designed for older homeowners.

Rather than repaying the balance at a fixed point, borrowers usually continue making monthly interest payments until they die or move into long-term care. The property is then sold, and the lender is repaid.

For suitable borrowers, RIO mortgages can provide a way to remain in their home while keeping monthly mortgage costs manageable.

The L&C insight

The biggest misconception about an interest only mortgages is that lower monthly payments make them cheaper. In reality, you're delaying repayment of the capital, not reducing it. The most important factor is having a credible repayment strategy and reviewing it regularly.

Common mistakes to avoid

The most common mistakes involve focusing on lower monthly payments without fully considering how the mortgage will be repaid.

Some borrowers fail to review investments regularly, rely on future property value growth, or leave repayment planning until the final years of the mortgage.

Regular reviews and professional advice can help ensure your repayment strategy remains realistic and suitable throughout the mortgage term.

Is an interest only mortgage right for you?

An interest only mortgage may be right for you if you have a clear repayment strategy, strong financial discipline and understand the risks involved.

It can provide flexibility, lower monthly payments and greater control over cash flow. This can make it attractive for landlords, investors and some higher-income households.

If you're unsure whether an interest only mortgage is right for you, speaking to a mortgage adviser can help you understand your options and make an informed decision.  

Key takeaways

• An interest only mortgage allows you to pay only the interest charged each month.
• The amount borrowed remains outstanding throughout the mortgage term.
• Monthly payments are generally lower than with a repayment mortgage.
• You'll need a realistic repayment strategy to clear the debt.
• Eligibility requirements are often stricter than for repayment mortgages.
• Interest only mortgages can suit some borrowers but carry greater repayment risk.
• Professional advice can help determine whether this type of mortgage is suitable for your circumstances.