An interest only mortgage lets you pay just the interest charged on the loan amount each month.
Because none of the capital is cleared, the payments feel lighter than a standard repayment mortgage – but the full balance is still due when the mortgage term ends.
Below we explain the key things to know, from eligibility and application to building a solid repayment strategy that ensures you have enough money to clear the debt at the end of the mortgage.
What Is an Interest Only Mortgage?
- Monthly payments cover interest only; the mortgage balance stays unchanged.
- At the end of the term – often 25 – 40 years – you must repay the amount you borrowed in a single lump sum.
- Suitable repayment vehicles can include ISAs, pensions, endowment policies, shares or the planned sale of the property.
- Lenders insist on robust proof that you can repay the loan in full; otherwise they will recommend a repayment mortgage instead.
How Interest Only Mortgages Work Day-to-Day
- Interest charged is calculated on the outstanding loan amount every month.
- You make lower monthly mortgage payments than on an equivalent repayment plan.
- Over time you pay more interest in total because the principal never falls.
- You must review your chosen repayment plan regularly to ensure it grows fast enough to meet the remaining balance.
- If investments underperform you will need to top them up, switch strategy or consider selling the property.
Who Offers Interest Only Mortgages?
| Lender type | Typical criteria | Typical Maximum Loan to Value |
|---|---|---|
| High-street banks | Minimum income £75,000 single or £100,000 joint, clean credit, strong repayment strategy | 75 % |
| Building societies | Flexible on income if equity is high, accept pension lump sums as evidence | 70 % |
| Private banks | Cater to high earners with investments and multiple properties | 80 % on bespoke terms |
Most borrowers use mortgage advisers or mortgage brokers to match their profile with the right lender, check early repayment charges and secure a competitive fixed rate if rates suit their budget.
Eligibility and Application Process
Lenders start by checking income and credit history, so be ready with payslips, business accounts and a clean credit file. You must also supply proof of a repayment vehicle, for example recent statements for ISAs, pensions, bonds or an endowment policy, or a signed agreement to sell another asset.
A deposit of at least 25 percent is the norm, although some specialist banks raise the bar to 40 percent of the property’s value. Every application goes through an affordability model that stress-tests your budget in case mortgage interest rates climb by three percentage points.
You can apply direct, complete an online form or ask a broker to handle the paperwork and liaise with the lender’s mortgage team.
Repayment Strategies That Lenders Will Accept
Acceptable repayment plans include cash ISAs or stocks-and-shares ISAs that receive regular top-ups, traditional endowment policies, and company or personal pensions that release a large enough tax-free lump sum.
Some borrowers rely on selling a second property or downsizing the current home, provided there is strong equity and an independent valuation to back the figures. Others use diversified investment portfolios run by FCA-regulated advisers.
Whatever strategy you choose, review projected values every year and increase contributions if growth falls behind target.
Pros and Cons of Interest Only Mortgages
| Pros | Cons |
|---|---|
| Lower monthly payments free up cash for investments | You still owe the original loan at the end of the mortgage |
| Flexible saving options to suit your risk appetite | If your repayment vehicle underperforms you must plug the gap |
| Can work well for high earners with variable bonuses | Lenders may charge higher mortgage interest rates and limit LTV |
| Potential tax advantages if investments beat inflation | Market downturns can leave you short of funds to clear the balance |
Using Mortgage Calculators to Test the Numbers
- Interest only calculator – shows the minimum payment based on the interest on the amount borrowed.
- Repayment comparison tool – contrasts interest only with full repayment to highlight the cost of paying more interest long-term.
- End-of-term shortfall checker – estimates the gap if investments grow below expectation.
- Early repayment calculator – models the fee if you decide to switch to a repayment mortgage after a few years.
Try different rates, terms and loan amounts until the plan fits comfortably within your personal circumstances and risk tolerance.
Ready to Explore Interest Only Options?
Our advisers at The Mortgage Pod arrange interest only and part-and-part mortgages every day.
We assess your repayment plans, compare offers from multiple lenders and guide you from illustration to completion. Speak to our team today for tailored advice.
FAQs
Do first time buyers qualify for interest only mortgages?
Potentially. Depending on circumstances, such as level of income. A part-interest, part-repayment option may also be possible.
What happens if house prices fall and I planned to sell?
If the sale proceeds no longer cover the debt you must pay the difference from savings or arrange a new loan.
Can I switch from interest only to repayment mid-term?
Yes, subject to affordability and any early repayment charge on your current deal. Many borrowers convert once earnings rise.
Are interest only rates higher than repayment rates?
Often slightly higher, though some lenders price them the same as long as the repayment plan is robust and LTV is low.
What evidence do lenders accept for investments?
Recent statements, portfolio valuations and policy documents showing maturity dates and projected values that match the full balance.
