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An interest-only mortgage means your mortgage payments only cover the interest on your loan, not any of the original capital amount. Your mortgage repayments will be lower but there are some major pitfalls to beware of. We look at the pros and cons.
With an interest-only mortgage, your monthly repayments will only cover the interest charges on your loan, you won’t pay off any of the capital you have borrowed.
This means your mortgage payments will be lower, but at the end of the mortgage term you will still owe the original amount you borrowed which you will need to repay.
However, you can get ‘part and part’ mortgages, which are a combination of both repayment and interest only mortgages. Read on for more on these.
You can also get retirement interest-only mortgages which are for older borrowers who want to live in their home without paying off their mortgage. Click here to jump down for more on retirement interest only mortgages.
Here’s a summary of how interest-only mortgages work:
| Interest-only mortgage | Capital repayment mortgage |
|---|---|
| An interest-only mortgage is a type of mortgage when you only pay the loan’s interest. At the end of the term, you need to pay back the original amount borrowed. | A capital repayment mortgage means you’ll pay off part of the mortgage and the interest each month. At the end of the term your mortgage will be paid off. |
| Your monthly mortgage payments will be lower. | Your monthly mortgage repayments will be higher. |
| There’s a higher risk of negative equity. This is because you won’t build up equity in your home via your mortgage payments which means you’re more exposed to changes in house prices. | You’ll build up equity in your home over time by making your mortgage repayments. |
| More expensive overall than a repayment mortgage as you’ll continue to pay interest on the original amount you borrowed. | You’ll pay less interest overall. |
Get expert advice on interest-only mortgages from fee-free mortgage brokers L&C
Get fee free mortgage advice from our partners at L&C. Use the online mortgage finder or speak to an advisor today.
Monthly mortgage payments are lower with interest-only mortgages because your payments only cover the interest on the loan, you don’t pay off any of the capital you originally borrowed.
Here’s an illustration of how much your mortgage payments would be on an interest-only mortgage vs a repayment mortgage if you take out £250,000 at rate of 4%. The repayment mortgage example is based over a 25 year term.
| Type of mortgage | Monthly mortgage cost |
|---|---|
| Interest-only mortgage | £833 |
| Repayment mortgage | £1,320 |
Most Buy to Let mortgages are interest-only. These mortgages can be an attractive option for landlords because it allows them to keep their monthly costs down. Also, a landlord’s repayment plan may be to sell the property at the end of the mortgage term, hopefully making a profit.
By putting the money you save on mortgage payments into other investments you may get a higher return and be able to repay the mortgage faster. Although this is a high risk route and it is a good idea to get independent financial advice first.
You don’t have to make life’s big financial decisions alone. Get the right IFA for you today with our partners at Unbiased.
When you take out an interest-only mortgage, the amount of capital you owe doesn’t reduce over time and you’ll have to pay interest on the original amount you borrowed throughout the whole term.
For example, this table illustrates how much you would pay overall by taking out an interest-only mortgage vs a repayment mortgage. It uses the example of taking out £250,000 over a 25 year term at a rate of 4%.
| Type | Loan amount | Interest over the term | Total amount to repay (loan + interest) |
|---|---|---|---|
| Interest-only | £250,000 | £250,000 | £500,000 |
| Repayment | £250,000 | £145,878 | £395,878 |
Lenders view interest-only mortgages riskier than repayment mortgages because they require you to have a large lump sum at the end of the term to pay off the loan. As a result, lenders’ criteria is typically stricter than if you apply for a residential capital repayment mortgage.
If you take out a repayment mortgage, you’ll build equity over time as you make your mortgage payments. However, if you take out an interest-only mortgage, you’ll be relying on house price increases to build any more equity in your house. But if your house’s value drops, you’ll be at more risk of negative equity.
Before taking out an interest-only mortgage, you need to think seriously about what if you can’t afford to pay off the lump sum at the end of the term? For example if the repayment vehicle you have put in place doesn’t perform as well as you had hoped. This means you might have to sell your home.
Get fee free mortgage advice from our partners at L&C. Use the online mortgage finder or speak to an advisor today.
David Hollingworth at L&C Mortgages said: “Interest-only does what the name implies, and the monthly payment only covers the interest charged on the mortgage. That requires an alternative repayment strategy, such as a separate investment vehicle, to be in place to hopefully grow adequately to repay the balance by the end of the term.
“This choice is often talked about as an either/or decision but it’s possible to split the mortgage into separate elements and structure it on a part repayment, part interest only basis. The flip side is the risk that the repayment vehicle will not grow adequately to meet the outstanding mortgage amount. That’s why it’s important to keep the repayment vehicle under regular review.
When it comes to your mortgage it’s advisable get expert advice. So speak to a fee-free mortgage broker to help you find the best mortgage for your circumstances.
There are different types of interest-only mortgage for example,
It’s a good idea to speak to a fee-free mortgage broker to help you decide which type of interest-only mortgage is best for you.
Lenders’ interest-only mortgage criteria is stricter than if you’re taking out a residential capital repayment mortgage:
However, each lender has its own lending criteria so if you’re interested in finding out more about interest-only mortgages it’s a good idea to speak to a fee-free mortgage broker. They’ll discuss your circumstances and be able to advise you on the lenders that may be most likely to accept your application.
Also, eligibility criteria for interest-only mortgages is different if you’re looking for a Buy To Let Mortgage.
Get expert mortgage advice and find the best interest-only mortgage rates from fee-free mortgage brokers L&C
Due to the strict lending criteria for interest-only mortgages, people who take them out may tend to be people who are:
If you’re considering taking out an interest-only mortgage, you’ll need to work out how you’ll repay it. Here are some options you may consider:
Once you’ve set up your plan, review it often to make sure it’s on target. Bear in mind that your lender may check in from time to time asking you to show them that your payment plan is on track.
Also, keep an eye on house prices because if you need to sell the property to repay the loan and it’s worth less than you bought it for you’ll need to make up the shortfall. If you’re worried that you’ve fallen behind with your repayment plan you can seek free financial advice from MoneyHelper.
Interest-only mortgages are offered by a wide range of mortgage lenders including:
However, if you’re looking for an interest-only mortgage, the best mortgage lender for you will depend on your circumstances. So speak to a fee-free mortgage broker.
Fee-free mortgage brokers work with over 90 different mortgage lenders so can compare a whole range of mortgage deals. You can speak to them today or start the process online.
To instantly see a repayment mortgage vs interest only mortgage comparison, use our handy interest-only repayment calculator below.
The interest-only mortgage rates you’ll be able to access will depend on your circumstances including your income and your deposit if you’re buying a house or the amount of equity you have in your home if you’re remortgaging.
The easiest way to find out what interest-only mortgage rates you can access is by speaking to a fee-free mortgage broker.
Interest-only mortgages may be becoming less popular overall but it’s a different picture for Buy to Let mortgages, as the majority of these are interest-only deals.
Lower monthly repayments are attractive to many landlords and if they need to sell the property at the end of the term to pay off the mortgage (hopefully making a profit in doing so) they will be selling an asset rather than their home. Find more information in our guide to Buy To Let Mortgages explained.
A part and part mortgage is a combination of both repayment and interest only mortgage.
This means part of your mortgage is on an interest only basis and you’re repayments will only cover the interest on the loan. But the other part of your mortgage is on a repayment basis, so your monthly repayments will over some of the capital you originally borrowed as well as the interest on the loan.
Here at the HomeOwners Alliance, we have compiled the best mortgage lenders, based on how competitive their mortgage rates have been in recent months, as well as the size of the lender based on figures from UK Finance, and popularity with our readers. Find more in our guide to the best mortgage lenders.
However, our reviews are our opinion and do not constitute advice, recommendation or suitability for your financial circumstances. To get tailored advice, speak to an expert mortgage broker.
Get expert advice on interest-only mortgages from fee-free mortgage brokers L&C
Get fee free mortgage advice from our partners at L&C. Use the online mortgage finder or speak to an advisor today.
Yes, it’s possible to switch to an interest-only mortgage. In fact, according to UK Finance, some 61,000 mortgages were switched from repayment to interest-only in 2023, up from 2,000 in 2022, reports The Times.
Many people have opted to switch to interest-only to save money after coming off ultra-low mortgage rates and being hit by much higher mortgage rates. While some have switched to interest-only to free up money for things like school fees.
However, you’ll need to meet your lender’s criteria if you want to do this. The rules are different if you want to switch temporarily – read on for more on this.
If you’ve got a mortgage and you’re struggling to pay it you might be able to temporarily switch your mortgage to interest-only for up to 6 months under the Mortgage Charter announced by the previous government. If you’re ever struggling to pay your mortgage, it’s advisable to speak to your lender as soon as possible.
There may be different options open to you if you are over the age of fifty. For example, retirement interest-only mortgages are home loans designed for older borrowers who may struggle to get a traditional mortgage due to their age. See more guidance on mortgages for over 50s.
You may also consider equity release schemes: These enable older homeowners to tap into the value of their property without the need to sell up and move out. This equity can be used to pay down what you owe. However, do seek advice on any risks involved. See our guide Is equity release right for me?
You don’t have to make life’s big financial decisions alone. Get the right IFA for you today with our partners at Unbiased.
– This depends on your circumstances because although you’ll benefit from lower mortgage payments, you won’t be paying off any of the capital you’ve borrowed so you’ll need to have a plan of how to pay this off. Plus, these mortgages have stricter eligibility criteria.
– However, one exception is Buy to Let mortgages as interest-only mortgages are common with these mortgages.
If you took out a £100,000 interest-only mortgage at a rate of 4%, your monthly repayments would be £333. By comparison, if you took out a repayment mortgage over 25 years, you’d pay £528 a month, in the initial term. To see instantly how much you’ll pay on your mortgage and compare repayment mortgages to interest-only, use our handy interest-only repayment calculator.
When you take out an interest-only mortgage you’ll only pay off the interest on the loan, you won’t pay off any of the capital you borrowed. So at the end of the term, you’ll need to repay the full amount you borrowed. There are also different types of interest-only mortgages, fixed and variable-rate. Read more in our guide on Understanding mortgage types and what one you need.
With mortgages and bad credit there are no hard and fast rules because it will always depend on the type of credit issues and how recent they were. And in many cases you can still get a mortgage with bad credit, although it’s likely you’ll be charged a higher rate. So it’s a good idea to get advice from a fee-free mortgage broker as they’ll be able to explain your options to you. And read our guide on Mortgages for bad credit.
While this will vary by lender, for an interest-only mortgage you’ll usually need a bigger deposit than you would for a residential repayment mortgage.
Yes, however you may find you need a higher joint income than if you apply on your own.
Like all mortgages, interest-only mortgage rates in the UK can change quickly. So the best – and quickest – way to find out what interest-only mortgage rates is to speak to a fee-free mortgage broker.
Yes however, you may have to pay an early repayment charge, so always check.
This depends on the lender. Some lenders don’t have a minimum income requirement for interest-only mortgages, as long as you meet its lending criteria. But some lenders do have minimum income requirements and these can be high. For example, Virgin Money requires a minimum sole or joint income of £75,000 to take out a residential interest-only mortgage.
HomeOwners Alliance Ltd is registered in England, company number 07861605. Information provided on HomeOwners Alliance is not intended as a recommendation or financial advice.
Mortgage service provided by London & Country Mortgages (L&C), Unit 26 (2.06), Newark Works, 2 Foundry Lane, Bath BA2 3GZ, authorised and regulated by the Financial Conduct Authority (FRN: 143002). The FCA does not regulate most Buy to Let mortgages. Your home or property may be repossessed if you do not keep up repayments on your mortgage.
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