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Interest-only Mortgage FAQ

What is an Interest-Only Mortgage?

An interest-only mortgage is a type of mortgage where you only pay the interest on the loan each month, without repaying the capital (the amount borrowed). This means that your monthly repayments are lower compared to a repayment mortgage (where you pay both interest and capital). However, at the end of the mortgage term, you will still owe the full amount borrowed and will need to repay it in full.

What’s the Alternative to an Interest-Only Mortgage?

The main alternative is a repayment mortgage, where your monthly payments cover both interest and capital. By the end of the mortgage term, the entire loan is fully repaid.

Why Do People Choose an Interest-Only Mortgage?

People opt for interest-only mortgages for several reasons:

Lower Monthly Payments– Ideal for those who need to keep monthly costs low, such as landlords with buy-to-let properties.
Investment Strategy– Some use savings, investments, or other assets to repay the loan at the end of the term.
Temporary Financial Relief– Borrowers who expect a future income boost may prefer interest-only payments for now.
Maximising Cash Flow– Popular with property investors who want to maintain liquidity for other investments.

Often, the financial strategy of those who take out interest only mortgages is that they hope the property will increase in value over time, allowing them to sell the property and make a profit from the appreciation. For example, if house prices increase by 4% each year a house’s value would double in 18 years. So, if you bought a property for today for £100k, it might mean that in about 18 years you could sell it for £200k. You’d pay £100k of the proceeds to the mortgage lender for the original loan, and you’d keep £100k for yourself.

Can I Change My Mortgage to Interest-Only?

It may be possible to switch to an interest-only mortgage, but it depends on:

Your lender’s criteria– When is your repayment mortgage coming to an end. If you are tied into a repayment mortgage lenders may not be keen to switch.
Your income and affordability– You must prove you can repay the loan at the end of the term if you are a residential borrower.
Your loan-to-value (LTV) ratio– If you have a high LTV, lenders may be reluctant. The loan should be 75%, or less, of the property’s value.
Your repayment plan– Lenders usually want evidence of investments, pensions, or other assets that will cover the repayments from residential borrowers. If you want an interest-only mortgage as part of a buy-to-let, you’ll need to demonstrate rental potential income the property will earn, as well as your own personal income in case rents are withheld.

If you’re currently on a repayment mortgage and struggling with payments, you could discuss options with your lender, such as switching to an interest-only deal temporarily.

What Happens at the End of an Interest-Only Mortgage?

At the end of the term, you must repay the full loan amount in one go. Options include:

Using savings or investments– If you have a repayment strategy in place.
Selling the property– If you don’t have funds to repay, you may have to sell.
Refinancing or extending the mortgage– If eligible, you might switch to a repayment mortgage or remortgage for a new deal.