They let you make monthly payments that only cover the interest you owe.
They come with lower monthly repayments than other mortgages, but at the end of its term you will still owe the same amount you borrowed and have to pay it back in full.
This is because your repayments do not go towards reducing the amount you owe; they only cover the interest charged on it.
For example, if you took out a £180,000 interest only mortgage with an interest rate of 3.5%, the monthly repayments could be £525. However, you would still owe £180,000 when the mortgage ended.
How to pay it off
If you get a buy to let property with an interest only mortgage, you could sell the property at the end of its term to pay it back.
If you use one to buy your own home, you need to save or invest during the mortgage term so you can repay the balance when the mortgage ends.
You can do this using a lump sum like an inheritance, but usually you need to save up using either:
You have to tell your mortgage lender how you will pay off the mortgage's balance when you apply.
What are repayment mortgages?
Most property purchases are made using a repayment mortgage, which is the alternative to an interest only mortgage.
Your monthly repayments clear the balance of what you borrowed as well as paying the interest.
Which type is cheaper?
Interest only mortgages usually come with lower monthly repayments but cost more in total over their whole term.
Repayment mortgages usually cost more each month but less over the mortgage's term.
Read this guide to interest only and repayment mortgages for a breakdown of how much each type costs and which will suit you better.
Interest only mortgage FAQs
Can I find an interest only mortgage for buy to let?
Most buy to let mortgages are interest only. You can compare buy to let mortgages here.
Can I get a part and part mortgage?
Yes, you can get mortgages with balances that decrease as you make payments but will not be fully paid off at the term's end.
Can I find an interest only remortgage?
Yes, you could switch to a new interest only deal. Here is what you need to know about remortgaging.
Can I switch between repayment and interest only?
Yes, you can switch from one type of mortgage to the other. Here is how to remortgage.