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Published 17 January 2024
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Interest Only Mortgages

With an interest only mortgage you’ll only pay off the mortgage interest each month, but none of the original loan. Learn more about how these mortgages work, and what to consider when searching for the best interest only mortgages.

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Interest only mortgages may not be as common as they once were, but they can offer the chance to keep your monthly repayments low. However, because you’re not repaying your original mortgage amount as you go, you’ll need a suitable repayment plan to pay it back at the end of your mortgage term. 

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What is an interest only mortgage?

An interest only mortgage is a type of mortgage where you only pay off the interest on the amount you’ve borrowed each month and not any of the actual amount you’ve borrowed, or capital, itself. As a result, the mortgage repayments on an interest only mortgage will be lower than on a similar capital repayment mortgage at the same interest rate. However, your original loan amount will still need to be paid off at the end. 

How does an interest only mortgage work? 

Because the monthly repayments on an interest only mortgage are only enough to clear the interest you’re charged that month, you will owe the same amount on your mortgage from the beginning through to the end. So if you take out an interest only mortgage for £100,000, you’ll still need to pay your lender £100,000 to settle the original mortgage at the end of your mortgage term despite making payments each month. 

Interest only mortgage rates can be either fixed or variable. With a fixed-rate mortgage you have the security of knowing that your interest rate, and monthly repayments, will stay the same throughout the initial deal period for which you’ve fixed. With a variable rate mortgage, such as a tracker mortgage, the interest rate you pay, and therefore your repayments, have the potential to rise or fall. Once any introductory rate period ends, you’ll usually move onto your lender’s standard variable rate (SVR) unless you decide to remortgage to a new deal.

» MORE: How are fixed and variable rate mortgages different? 

What happens at the end of an interest only mortgage?

You will need to pay off your original loan amount when your interest only mortgage term ends. This is because you don’t pay it back when making the standard repayments during the mortgage term. 

Mortgage lenders will want to know what your repayment strategy is when you apply for an interest only mortgage. Investments, savings, pensions or certain other assets may be acceptable, but requirements can differ between lenders.

What is the difference between interest only and repayment mortgages? 

A mortgage can be repaid on either a capital and interest repayment or an interest only basis. 

» MORE: Should I get an interest-only or repayment mortgage?

Interest only mortgage comparison

The table below shows how monthly repayments and the interest you pay can differ depending on whether you opt for an interest only mortgage or a repayment mortgage. The figures are for a £200,000 mortgage which is repaid over a 25-year term at an interest rate of 5%.

Interest only mortgageCapital & interest repayment mortgage
Monthly repayment£833.33£1,169.18
Total interest paid over full term£250,000£150,754
Total repaid over full term (interest plus original loan)£450,000

(includes £200,000 lump sum payable at the end of the mortgage term) 

(no lump sum payable as original mortgage amount has been cleared over the term)

Interest only mortgage pros and cons

There are some upsides to taking out an interest only mortgage, but there are some important drawbacks to consider too. 

Advantages of interest only mortgages

The main advantages of interest only mortgages include:

Disadvantages of interest only mortgages 

Some of the potential disadvantages of interest only mortgages include: 

Can you still get interest only mortgages? 

It is possible to get an interest only mortgage to buy a residential property, but they are not as widely available as they once were. However, if you’re a landlord wanting to borrow to buy a rental property, you’ll find many of the buy-to-let mortgages are offered on an interest only basis.

» MORE: Best mortgage lenders

Can I get an interest only mortgage? 

Eligibility criteria for interest only mortgages tend to be stricter than for repayment mortgages, although qualifying requirements will differ between lenders. To give yourself a better chance of getting an interest only mortgage, you’re likely to need: 

It all means it is likely to prove more difficult to get an interest only mortgage if you are a first-time buyer. In fact, some lenders specify that they won’t offer interest only mortgages to first-time buyers. 

If you’re an older borrower who perhaps needs a way to pay off your existing mortgage or release equity in your home, some lenders offer retirement interest only mortgages, often known as RIO mortgages. However, these come with advantages and disadvantages. 

How to get the best interest only mortgage rates

Having a large deposit and a good credit score is usually key to getting the best interest only mortgage rates. However, the mortgage that best suits your needs overall may not always be the one with the lowest rate. 

Always make sure you shop around and compare interest only mortgage rates and lenders. Mortgage brokers, such as our partner London & Country Mortgages Ltd (L&C), may have access to mortgage deals and rates that you can’t get directly. L&C can also offer you fee-free advice. 

» MORE: See current mortgage rates  

How to pay off an interest only mortgage

There are several ways you could pay off the capital of an interest only mortgage, and you’ll need to have a plan in place when you apply. What qualifies as an acceptable repayment strategy can differ between lenders, but may include:

A lender has discretion as to whether they feel you have an adequate repayment plan in place and are willing to offer you a mortgage. You can also expect a lender to check whether your strategy remains on course to pay off your loan at some point during the mortgage term. 

Some potential repayment options that tend not to prove acceptable include the expectation of an inheritance, bonus from work or another windfall. Solely relying on property values rising so you can downsize and release equity also isn’t typically seen as a viable repayment strategy for a residential interest-only mortgage. If it is, a lender will usually want there to be a certain minimum amount of equity in the property. However, planning to sell your property is more likely to be deemed acceptable if you’re taking out a buy-to-let mortgage.  

What if I can’t pay off my interest only mortgage?

If you have an interest only mortgage and are concerned that you won’t be able to repay your loan, you should talk to your lender or seek mortgage advice straight away.  

Some of the options you might have include:

Selling up is often considered an option of last resort, but if the value of your home has increased, you may still have funds left over once your mortgage is settled to help find a new place to live. However, if house prices have dropped, and your property is now worth less than your mortgage, you’re in negative equity and selling won’t raise enough to repay what you owe.

While most lenders will want to find a suitable way forward your home might be at risk of being repossessed if a solution can’t be found.

Can you overpay on an interest only mortgage? 

Overpaying an interest only mortgage means you will start repaying some of your original loan amount, leaving you less to pay back at the end of the mortgage term. It may be possible to overpay a mortgage by up to 10% of your outstanding balance each year, or sometimes more, without incurring early repayment charges. However, you should always check the terms and conditions of your mortgage first to make sure such charges are avoided.   

Do I need advice?

If you’re comfortable with what an interest only mortgage entails, there’s nothing to stop you from directly approaching a lender yourself.

That said, interest only mortgages aren’t always straightforward, particularly in relation to repayment plans, so using a mortgage adviser may be sensible. Some lenders will only allow you to take out an interest only mortgage if you apply through a mortgage broker. 

If you think you need mortgage advice, we’ve partnered with online mortgage broker London & Country Mortgages Ltd (L&C) who can offer you fee-free advice. 

Interest only mortgage FAQs

Is it worth getting an interest only mortgage?

An Interest only mortgage may be worth considering if you want lower monthly repayments, and are confident you’ll be able to pay off your mortgage loan in the future. The main risk is that your repayment strategy doesn’t work out as intended, and you face a shortfall when it comes to paying back your original loan.

How much deposit do I need for an interest only mortgage?

You’ll likely need a bigger deposit with an interest only mortgage than a repayment mortgage, although requirements can differ between lenders.

Some interest only mortgage lenders work to a maximum loan to value (LTV) of 75%, meaning you’ll need a 25% deposit, but there may be lenders who require more.

Can I get an interest only mortgage with bad credit?

It is less likely but may be possible to get an interest only mortgage if you have bad credit, but you may need to use a mortgage broker to find a willing lender.

Can you pay off an interest only mortgage early?

Interest only mortgages can be paid off early but always check with your lender first in case there are early repayment charges for doing so, especially if you are within a fixed rate deal period.

Can you get an interest only mortgage as a first time buyer?

First-time buyers may be able to get an interest only mortgage, but higher deposit and income requirements will often be an obstacle. Some lenders also explicitly state they won’t offer interest only mortgages to first-time buyers.

Are buy-to-let mortgages interest only?

Many buy-to-let mortgages are interest only, although you can get buy-to-let mortgages on a repayment basis too.

Can I change my interest only mortgage to repayment?

If you can prove the higher repayments will be affordable, it should be possible to switch from an interest only mortgage to a repayment mortgage. You might be able to do a product transfer with your current lender, or you may want to remortgage and switch to a new lender if they are offering a better deal.

Dive even deeper

Holiday Let Mortgages: Buying a Holiday Home to Rent Out

Holiday Let Mortgages: Buying a Holiday Home to Rent Out

A holiday let mortgage is used to buy property to rent out to paying guests. Buying a holiday let home can provide you with an income stream and certain tax benefits if you follow the rules.

When Can You Remortgage?

When Can You Remortgage?

It’s possible to remortgage whenever and how often you like, but there may be charges if you remortgage before your current deal ends.

How Long Does a Remortgage Take?

How Long Does a Remortgage Take?

The remortgaging process may take one to two months if you’re switching to a new lender, and maybe less than a week if you stay with your current lender.

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