An interest-only mortgage lets you pay only the interest on your loan each month without reducing the original amount borrowed. Unlike a repayment mortgage, where you gradually pay off the capital and interest, with an interest-only mortgage, you’ll still owe the full £100,000 at the end of your term.
Many borrowers—including landlords—choose this option because it offers lower monthly payments, greater flexibility and can work well as part of a buy-to-let investment strategy (a lower mortgage means more profits on the rental income).
Understanding interest-only mortgage payments
With an interest-only mortgage, your monthly payment only covers the interest on your loan. For a £100,000 mortgage, you’ll pay the annual interest rate divided into 12 monthly payments.
The monthly cost is straightforward to calculate:
- Mortgage amount (£100,000) × annual interest rate ÷ 12 = monthly payment
The easiest way to calculate how much you’ll pay each month on an interest-only mortgage is to use our free interest-only mortgage calculator here!
Monthly payment examples for a £100k interest-only mortgage
Here’s what you might pay each month on a £100,000 interest-only mortgage at different interest rates:
- 3% interest rate → £250 per month
- 4% interest rate → £333 per month
- 5% interest rate → £417 per month
- 6% interest rate → £500 per month
Try out our free interest-only mortgage calculator here for other calculations.
Factors that affect your monthly payments
There are several aspects that influence how much you’ll pay each month, from the interest rate to the mortgage type (eg, fixed or variable).
Interest rate
The interest rate is the biggest factor in determining how much you’ll pay. Only a 1% difference can add £83 a month to repayments on a £100k loan.
Lender terms
Banks and building societies offer various rates based on your credit history, income and the type of mortgage product you choose.
Fixed vs variable rates
Fixed-rate mortgages keep your payments stable for a set period (typically between two or five years), while variable or tracker rates can change, meaning your monthly payments can rise or fall.
Economic conditions
If you’re on a variable rate or tracker, changes to the Bank of England base rate will affect your monthly payments. When the base rate is higher, your mortgage costs will increase. But when it’s lower, they should go down.
Important considerations
Remember that while interest-only mortgages offer lower monthly payments, you’ll need a solid plan to repay the £100,000 capital at the end of the term. Common repayment strategies include:
- Regular investments into stocks and shares ISAs
- Pension lump sums
- Sale of other properties or the property you’re mortgaging
- Future inheritance
- Converting to a repayment mortgage later
Lenders will want to see evidence of your repayment strategy before approving an interest-only mortgage.
Know you numbers
A £100,000 interest-only mortgage will cost between £250 and £500 per month depending on your interest rate. While this can make homeownership more affordable in the short term, you need to have a credible plan to repay the full £100,000 when the mortgage term ends.
Struggling with high mortgage rates?
If you’re a homeowner looking at switching down to an interest only mortgage to reduce monthly payments, or perhaps you’re a landland who is trying to make renting profitable, you might find it challenging in the current economic climate. If you come to the conclusion that selling the property and cashing out is the best option for you, then keep Property Rescue in mind. We will buy any property directly from the owner, for cash, in as little as 7 days – or in a timeframe of your choosing. Get in touch if that sounds interesting.