Best interest-only mortgage deals

What is an interest-only mortgage?

An interest-only mortgage is a bit different from most other types of mortgages. With this kind of deal, you only pay the interest each month – not the loan itself. That means your monthly payments will be lower, but you’ll need a plan in place to repay the full amount you borrowed at the end of the term.

Find your best interest-only mortgage

If you’re searching for the best interest-only mortgage rates, our advisers can help you find the most competitive deals. We work with over 90 lenders and can compare options to find the right one for your needs.

To get started, check out our best interest-only mortgage rate table, which shows the lowest rate available today. You can also start your online application to see which mortgages you qualify for.

Apply for an interest-only mortgage with L&C

Whether over the phone or using our online Mortgage Finder, it’s easy to get started with L&C. Just answer all the questions like how long you want your mortgage to last, how much deposit you have and how much you’re looking to borrow, and we'll narrow down your search to all the deals you could qualify for.

Your expert adviser will talk you through your options and help you to decide whether an interest-only mortgage is right for you. Once we’ve found the right deal and you’re ready to go ahead, we’ll guide you through the application process from start to finish and you can track its progress online 24/7.

Types of interest-only mortgages

These mortgages are available for both owner-residents and landlords, although it may be easier to get a Buy to Let interest-only mortgage.

This is because landlords typically treat the property as an investment rather than their home, and so lenders may have less stringent criteria for interest-only buy to let mortgages than residential ones.

This may be appealing to landlords looking to keep their property costs to a minimum. By paying back only the interest every month, it keeps your monthly outgoings down.

Older people may also be suited to a retirement interest-only mortgage. These are designed for older homeowners and allow people to keep their home but only pay monthly mortgage interest payments until they die or go into long-term care. At that point, the property is sold and the capital is repaid to the lender.

As you only pay interest every month, repayments are relatively low which can give retired people financial flexibility - and there’s no need to worry about finding a lump sum to pay back the mortgage at the end of the term as with a standard interest-only mortgage. However, the capital does still need to be repaid which could have an impact on any inheritance you might want to leave your loved ones.

How interest-only mortgages work

With an interest-only mortgage, your monthly payments only cover the cost of borrowing the money, the interest. You don’t pay off any of the actual loan amount (the capital) during the mortgage term. So, your mortgage balance stays exactly the same month after month.

Let’s say you borrow £200,000 over 25 years. With a repayment mortgage, you’d gradually reduce that £200,000 over time until it’s all paid off. But with an interest-only mortgage, you’d still owe the full £200,000 at the end of the 25 years, because none of it has been repaid. Only the interest has.

That means there are three key things to understand:

You’ll still owe the full amount at the end of the mortgage term

Because you’re not paying off the loan itself, you’ll need to have a separate plan in place to repay it in full when the mortgage ends. This could be:

• Selling your home and using the money to pay off the mortgage
• Using savings or investments that have grown over time
• Selling another property or asset

Whatever your plan is, it’s important to think about how realistic it is, and whether it will give you enough money at the right time. If you don’t have a way to pay off the loan, you could be at risk of losing your home or being forced to sell it when the mortgage ends.

Your monthly payments will be lower than with a repayment mortgage

Because you’re only paying the interest each month (and not the loan itself), your monthly payments will be much lower than they would be with a repayment mortgage of the same size and length.

• Have irregular or seasonal income
• Want more flexibility with your money
• Need lower outgoings in the short term while you focus on other financial goals (like saving for a business or helping your family)

But remember, lower monthly payments now mean you’re not reducing your debt. The full loan still needs to be paid off later, in one go.

You’ll need a plan in place to repay the loan in full

Lenders won’t usually offer an interest-only mortgage unless you can show how you’ll repay the capital at the end. This is called your repayment strategy or repayment vehicle.

Some common examples include:

• ISAs or other investments you expect to grow over time
• Pensions (if you're planning to take a lump sum from your pension to repay the loan)
• Sale of another property (like a second home or buy-to-let)
• Sale of the property the mortgage is secured against (you live in the house for now, then sell it later)

Lenders will want to see proof that your plan is realistic. For example, if you’re relying on investments, they might ask for recent statements. If you’re planning to sell a property, they’ll want to know how much it’s worth and when you expect to sell it.

You’ll need to review this plan regularly to make sure you’re still on track. If something changes, like your investments don’t perform as expected, you’ll need to adjust your approach.

Interest-only mortgage repayment plan

When your mortgage term finishes, with an interest-only mortgage, you must repay the full amount originally borrowed. If you’re not sure that you’ll be able to do so, there are options before you reach the end of your term as you may be able to switch to a repayment mortgage instead or make overpayments to reduce the amount you owe.

If you want to pay off your mortgage early or overpay, you may have to pay an Early Repayment Charge (ERC). Check the terms of your mortgage to see if this applies to you, and bear in mind that ERCs can be a significant expense.

However, most lenders do allow you to make overpayments, usually of up to 10% of the mortgage value each year without an extra charge. This can help you to reduce the amount you owe gradually whilst avoiding ERCs.

Lenders will want to see a solid plan for how you’ll repay the full loan at the end. This might include:

• Stocks and shares ISAs
• Investment portfolios
• Endowment policies
• Pension lump sums
• Sale of another property
• Bonuses or inheritance (if confirmed)

The lender will assess whether your plan is likely to provide enough money to repay the loan in full.

Can you switch to a repayment mortgage later?

Yes, you might be able to switch from an interest-only mortgage to a repayment mortgage in the future, especially if your financial situation improves or you decide you’d rather pay off the loan gradually.

But it’s not always guaranteed. You’ll need to meet your lender’s criteria at the time you want to switch. That usually means showing you can afford the higher monthly payments that come with a repayment mortgage.

Some people also choose to part-and-part mortgages, where you repay some of the loan and leave the rest as interest-only. This can offer a balance between keeping monthly costs down and reducing the debt over time.

Who can get an interest-only mortgage?

Interest-only mortgages aren’t suitable for everyone. Lenders tend to offer them to borrowers who:

• Have a high income or significant assets
• Are buying a property to let (Buy to Let mortgages are often interest-only)
• Have a clear and realistic repayment plan

Some lenders will also allow interest-only borrowing if it’s part of a mix – for example, part repayment and part interest-only.

You might need a larger deposit too. Many lenders will only offer interest-only mortgages up to a certain loan-to-value (LTV) ratio – often 50% to 75%.

Finding the best interest-only mortgage deal

L&C will scour the web to find the best interest-only mortgage rates for your personal circumstances.

We have access to thousands of deals across dozens of lenders so whether you’re looking to buy a residential property or want to find the best Buy to Let interest-only mortgage rates, we can help.

To increase your chances of getting a good deal, you should ensure you have saved as big a deposit as possible. You should check your own credit report before you make your mortgage application to check for any discrepancies, as even seemingly small issues can hamper your application. If you notice any mistakes, apply to have them rectified before proceeding.

As with any other type of mortgage, lenders will want to see a record of your incomings and outgoings, so you should be prepared to provide bank statements as well as proof of income.

Apply for an interest-only mortgage with L&C

If you think interest-only could work for you, we can help you find the right deal.

Compare today’s best interest-only mortgages online or speak to an expert adviser who’ll talk you through everything.

We’ll guide you from start to finish, and we don’t charge a fee.