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What's an interest-only mortgage?

With an interest-only mortgage, you only pay the interest each month. You repay none of the capital (the money you borrow to buy the property) during the mortgage term, which is usually between 25 and 30 years.

When you get an interest-only mortgage, you’ll need to agree to a final repayment plan with the lender. This is so they're confident you can repay the loan at the end of the mortgage term.

Monthly payments on an interest-only mortgage are much lower than those on a capital repayment mortgage since the latter includes both loan repayment and interest.

It’s less likely that you’ll use an interest-only mortgage to buy your own home as they're mostly used for buy-to-let purchases.

What's the difference between interest-only and repayment mortgages?

The biggest difference between an interest-only and a repayment mortgage is how you pay them back.

Capital repayment mortgage:

This is where you repay some of the loan balance and interest each month. As long as your interest rate stays the same, the interest charges reduce with your loan balance each month until you've eventually repaid it all.

At the end of the term, you own the property and have nothing more to pay.

Interest-only mortgage:

Here your balance doesn't reduce over time because you’re not repaying it. The interest you owe is the same every month – so long as the interest rate stays the same.

So you end up paying more interest overall with an interest-only mortgage, even though the monthly repayments are smaller.

You still need to repay the money you borrowed before you own the home.

Am I eligible for an interest-only mortgage?

If you want an interest-only mortgage, you'll need to meet the lender's affordability criteria and minimum age requirements. You’ll also usually need to have:

Larger deposit – lenders limit the loan to value (LTV) of this type of mortgage to around 75%. The LTV is the percentage of the property value they will lend – the rest would need to be made up with a deposit. This means that your deposit (or equity if you’re remortgaging) will usually need to be at least 25% of the property value.
Minimum income requirement – many high street lenders require you to earn a minimum income before you're eligible for an interest-only mortgage. How much varies between lenders, but is often £50,000-£75,000 for single applicants or a £100,000 combined income for joint applicants. If you’re not on a high enough income, your options are more limited.
Approved repayment vehicle – different lenders accept different repayment plans (which they often call a repayment vehicle). Some don't allow you to rely only on the sale of the property to repay the full mortgage, especially if it’s your residential home. If you want to use an ISA, pension or investments as your repayment plan, you’ll need to provide evidence of them. Some lenders may let you repay the loan by selling a buy-to-let property, or business premises.

If you want an interest-only mortgage to buy a residential property, the criteria are stricter.

It's best to speak to a mortgage broker like our partner, Mojo Mortgages. Their expert advisors can review your personal situation and tell you if you're eligible for an interest-only mortgage.

Interest-only mortgages with Mojo

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Just answer some questions about your situation and let Mojo's expert advisors guide you to a mortgage tailored to your needs. And the best part of it all is, it’s completely free (yes, really!).

With access to lenders across the whole of the market, Mojo advisors strive to save you money and find your best interest-only mortgage rate.

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Advantages and disadvantages of interest-only mortgages

Advantages of interest-only mortgages:

Cheaper monthly repayments – if you’re a landlord this can be helpful in keeping business costs low
Opportunity to invest – lower repayments leave you with more cash to invest in other ways, which means you could get a better financial return overall

Disadvantages of interest-only mortgages:

You pay more interest overall – as interest charges don’t reduce over time, the total interest you pay is higher than on a capital repayment mortgage at the same interest rate
It’s more difficult to qualify for – this type of mortgage is seen as riskier by lenders, so the criteria are stricter
Fewer lenders offer them for residential purchase – this means less choice and competition, so usually higher interest rates
Your repayment method could fail – if you’re relying on an investment or property to repay the loan at the end of the term, you could experience a shortfall

What repayment plans are available for interest-only mortgages?

The plan you use may be different depending on whether you’re using the interest-only mortgage for a residential or commercial reason.

It also depends on which repayment types your chosen lender allows. These include:

Inheritance
Sale of the property you’ve bought
Sale of other assets (high-value items like buy-to-let properties)
Investments
Savings
Regular overpayments – usually capped at 10% of the loan balance per year
The lump sum payment from your pension plan
Remortgaging onto a capital repayment mortgage or part and part mortgage
Remortgaging onto a retirement interest-only mortgages (RIO) if you’re 55+
Equity release lump sum if you’re 55-65+

Most lenders also like to check regularly that your repayment plan is going to be valuable enough to repay the debt at the end of the mortgage term. This could be by:

Checking that your home is increasing rather than decreasing in value
Monitoring the growth of your investments or pension plan – whatever you’ve chosen to repay the loan with

What happens at the end of an interest-only mortgage term?

When the term ends, you need to repay the full amount you borrowed to buy the property when you got the mortgage.

In some cases, lenders may let you extend the term or remortgage if you can't repay the loan at the time.

This depends on your personal circumstances, and you still need to commit to repaying by their extension date.

Can I pay off an interest only mortgage early?

You usually can, yes, but you’ll probably have to pay early repayment charges (ERCs).

ERCs can be as much as 5% of the outstanding balance on your mortgage. With an interest-only mortgage, this would mean 5% of the total amount you borrow.

What happens if I can’t repay my interest-only mortgage?

Some lenders may allow you to extend your mortgage, if you’re able to prove that you can repay the loan at a later date.

You may also be able to remortgage with your existing lender (known as a product transfer) or another lender.

This will probably need to be a capital repayment or a part interest-only, part repayment mortgage (known as a part and part mortgage).

As a final option you could sell the property to cover the repayment. If your home has decreased in value since you got the mortgage, you’ll need to pay the difference.

What our mortgage expert says

"Interest-only mortgages were more commonly used for residential properties before the 2008 financial crash. Nowadays it's much rarer to use them to buy a home to live in, but they're often used for buy-to-let properties."

Claire Flynn Contributing Senior Content Editor - Mortgages

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Learn about different mortgage types

Mortgages

Are a type of loan used to buy a property. The mortgage is secured against the value of the property. <style> </style>

Buy-to-let Mortgages

Aren't that different from a regular mortgage. But there are some important differences.

Remortgage

Are for when your current mortgage deal comes to an end.

Tips & guides on interest-only mortgages

The Bank of England base rate explained

The Bank of England base rate can affect how much interest you pay on your mortgage. Here’s how it works.

APRC explained

When looking at mortgages, you’re likely to come across your fair share of jargon and acronyms. Another one to add into the mix is APRC.

Early repayment charges explained

An early repayment charge, or ERC, is a fee that’s paid to your mortgage lender for paying off some types of mortgages early.

Should I take a mortgage holiday?

If you’ve taken a mortgage holiday or if you’re thinking about taking one, read on.

See all mortgage guides

Need more help?

Can I change my interest-only mortgage to a capital repayment mortgage?

Yes, you can. In fact, most mortgage lenders allow you to switch from an interest-only to a repayment mortgage without paying any fees.

This is because it’s in their best interest as you’ll be moving to a repayment method that is less risky to them.

This is also why it's more difficult to switch in the opposite direction from repayment to interest-only, unless it’s a temporary move.

Can I get an interest-only mortgage with bad credit?

It's possible but it's very difficult to achieve as lender's have a strict criteria. Lender's want to see that you have a solid repayment plan and if you have bad credit they may see you as unreliable.

If you do manage to get an interest-only mortgage with a specialised lender, you're likely to be charged a much higher rate of interest than someone with a good credit score.

What's a part and part mortgage?

A part and part mortgage is essentially a hybrid of a repayment mortgage and an interest-only mortgage.

Typically the beginning phase of the mortgage is interest-only. After the interest-only period ends, the borrower transitions to making full repayments, including both the capital and the interest.

It's important to understand the terms and associated risks with this type of mortgage, and it may be best to speak to a mortgage broker to make an informed decision based on your financial situation.

Page last reviewed: 10 April 2024

Reviewed by: Claire Flynn

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