Interest-Only Mortgage
A mortgage where your monthly payments cover only the interest, with the full original loan amount still owed at the end of the term.
What is an Interest-Only Mortgage?
With an interest-only mortgage, your monthly payments cover only the interest charged on the loan. You do not repay any of the capital during the mortgage term. At the end of the term, you must repay the full original amount borrowed in one lump sum. This means you need a separate plan -- known as a repayment vehicle -- to accumulate the funds to clear the debt.
Why it matters
Interest-only mortgages offer significantly lower monthly payments compared to repayment mortgages. On a £200,000 mortgage at 4.5%, the monthly interest-only payment would be approximately £750, compared to about £1,112 on a repayment basis over 25 years. That is a difference of over £360 per month.
However, at the end of the 25-year term, you still owe the full £200,000 and must have a credible way to repay it.
Who can get one
Interest-only mortgages for residential properties have become much harder to obtain since the 2008 financial crisis and the subsequent tightening of lending rules by the FCA. Most lenders now require a minimum income (often £75,000 or more), a low LTV (usually 75% or below), and a demonstrable repayment strategy such as investments, other property sales, or pension lump sums.
They remain more widely available for buy-to-let mortgages, where the assumption is that the property will be sold at the end of the term.
Repayment strategies
Common repayment vehicles include ISA investments, other savings and investments, proceeds from the sale of another property, or pension tax-free lump sums. Your lender will want to see evidence that your chosen strategy is realistic and on track.
Important caveats
The fundamental risk is that your repayment vehicle may not generate enough to clear the mortgage. If your investments underperform or property values fall, you could reach the end of your term unable to repay. Part-and-part mortgages, where a portion is on interest-only and the rest on repayment, offer a middle ground that reduces this risk while still keeping payments lower than a fully repayment mortgage.