A guide to interest-only mortgages
Interest-only mortgages have been a feature of the UK mortgage market for decades, though the rules and availability have changed significantly since the financial crisis. They remain a viable option for certain borrowers, but they require careful planning and a clear strategy for repaying the capital. This guide explains how they work and who they suit.
In this guide
How does an interest-only mortgage work?
With an interest-only mortgage, your monthly payments cover only the interest charged on the loan. You do not repay any of the original capital during the mortgage term. At the end of the term, you must repay the full amount you borrowed as a lump sum.
For example, if you borrow £200,000 on an interest-only basis at 4% over 25 years, your monthly payment would be approximately £667. On a repayment basis, the same loan would cost around £1,056 per month. The difference is significant, but with interest-only you still owe the full £200,000 at the end of the term.
This structure suits borrowers who have a clear and credible plan to repay the capital, whether through investments, property sales, pension lump sums, or other sources. Without a viable repayment vehicle, an interest-only mortgage can leave you with a debt you cannot clear at the end of the term.
Who is eligible for an interest-only mortgage?
Lenders have tightened interest-only criteria significantly in recent years. Most now require a minimum income, typically £75,000 or more for joint applicants, and a substantial equity stake in the property, usually at least 25–50%. Some lenders have additional requirements such as minimum loan sizes or maximum ages.
You must also demonstrate a credible repayment vehicle. Lenders will want to see evidence that your plan to repay the capital is realistic and has a reasonable chance of producing the required sum by the end of the mortgage term.
Advantages of interest-only mortgages
The main advantage is lower monthly payments, which frees up cash for other purposes. This can be particularly useful for high earners who want to invest the difference, for buy-to-let landlords who need to maximise rental yield, or for borrowers with irregular income who want lower fixed commitments.
Interest-only mortgages also offer flexibility. Some lenders allow you to switch between interest-only and repayment during the term, or to make ad hoc capital repayments when you choose. This can be a useful feature if your income varies or if you want to control the pace of capital reduction.
For some borrowers, the tax efficiency of interest-only can be a factor. Although mortgage interest tax relief for residential properties has been phased out, buy-to-let investors can still offset mortgage interest against rental income to some extent.
Risks to be aware of
The biggest risk is reaching the end of your mortgage term without enough money to repay the capital. If your investment underperforms, property values fall, or your circumstances change, you could face a shortfall. Lenders will contact you periodically to check your repayment vehicle is on track.
Interest-only mortgages also mean you build no equity through your monthly payments. If property prices remain flat or fall, you could end up in negative equity, owing more than the property is worth. This is a particular concern in the early years of the mortgage.
Related guides
More guides in our interest-only mortgage hub.
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