An interest-only mortgage is a home loan where your monthly payments cover only the interest charged, not the capital borrowed. You must repay the full loan amount at the end of the term using a separate repayment strategy such as investments, savings, or property sale.
How Interest-Only Mortgages Work
With an interest-only mortgage, your monthly payments only cover the interest on the loan — you don't repay any of the capital. This means your payments are significantly lower than a repayment mortgage, but at the end of the term, you still owe the full amount you originally borrowed.
For example, on a £300,000 mortgage at 4.5% over 25 years: a repayment mortgage costs roughly £1,668/month, while interest-only is just £1,125/month. But after 25 years, you still owe £300,000 on the interest-only mortgage.
Who Can Get an Interest-Only Mortgage?
Lenders have tightened criteria significantly since the 2008 financial crisis. Typical requirements include:
- Higher income: Many lenders require £75,000-£100,000+ household income
- Larger deposit: Usually 25%+ (some want 50%) — see our deposit guide for more
- Credible repayment plan: You must demonstrate how you'll repay the capital
- Maximum loan amount: Some lenders cap interest-only borrowing at £500,000-£1m
If you're self-employed, you may find additional flexibility with specialist lenders who understand variable income.
Repayment Strategies
Accepted repayment vehicles include:
- Sale of the mortgaged property: The most common strategy — suitable if the property is expected to retain value
- Investment portfolio: ISAs, pensions, shares, or other investments
- Sale of another property: If you own additional property
- Savings: Regular savings building up to the capital sum
- Part and part: Some lenders offer "part repayment, part interest-only" — giving you lower payments while still reducing the capital
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Part-and-Part Mortgages
A popular middle ground is a "part-and-part" mortgage where you pay interest only on a portion and repayment on the rest. For example, on a £300,000 mortgage, you might have £150,000 on interest-only and £150,000 on repayment.
This gives you lower monthly payments than full repayment while reducing the capital amount you'll need to find at the end of the term. A mortgage broker can help you work out the best split for your situation.
Risks to Consider
- You build no equity through payments — you rely entirely on property price growth
- If property values fall, you could end up in negative equity
- Your repayment plan may underperform, leaving a shortfall
- Remortgaging at the end of the term can be difficult, especially in retirement — equity release or a later-life mortgage may be an alternative for older borrowers
Frequently Asked Questions
- Can I still get an interest-only mortgage?
- Yes, but criteria are stricter than for repayment mortgages. Most lenders require a minimum income (often £75,000+), a larger deposit (25%+), and a credible repayment plan.
- What happens at the end of an interest-only mortgage?
- You must repay the full capital amount. This is typically done through selling the property, using savings/investments, downsizing, or switching to a repayment mortgage before the end of the term.
- Can I switch from interest-only to repayment?
- Yes. Most lenders allow you to switch from interest-only to repayment (or part-and-part) during the term. Your monthly payments will increase, but you'll start reducing the capital balance.
- Is interest-only suitable for first-time buyers?
- Rarely. Most lenders restrict interest-only to borrowers with high incomes and large deposits. First-time buyers are usually better served by a standard repayment mortgage — see our first-time buyer guide for details.
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