With an interest-only mortgages you only pay off the interest amount each month. This means at the end of the mortgage term, you'll need to repay the capital you borrowed.
| Mortgage term | Interest rate | Monthly interest repayments | Total monthly interest repayments | |
|---|---|---|---|---|
| 25 years | 5% | £751 | £225,165* |
*This example assumes your interest rate will remain the same over the full length of your mortgage. It's likely to change depending on the deal length, and whether you stay on your lender's standard variable rate or remortgage to a new deal.
In this example, when the mortgage term ends, you'll still owe the £180,000. So it's crucial that you have a repayment plan as the lender will want to know what this is.
If you're buying a buy-to-let, you can normally sell the property at the end of the mortgage term to pay back the capital you owe.
If you've used an interest-only mortgage to purchase your home, you might be able to pay off your mortgage using a lump sum of cash you've inherited. But you'll usually need to save up using either:
A savings account or ISA
An investment fund
An endowment policy
If you don’t have the funds, you’ll need to sell off your property to pay back the lender, but you'd need to find somewhere else to live.
This might work for you, for instance, if you’re planning to downsize. Alternatively, you could try and take out a new mortgage – either on an interest-only or repayment basis.
If you have a retirement interest-only mortgage, this will generally only need repaid once you die, move into long-term care or sell the property. They are similar to other types of equity release schemes such as lifetime mortgages.
Most property purchases are made using a repayment mortgage. This is when each monthly repayment pays off a portion of the amount borrowed, plus some interest. At the end of the mortgage term, you won't owe the lender any more money, and therefore you’ll own your house outright.
Repayment mortgages usually cost more each month, but less over the mortgage term. You'll normally find lower interest rates available for repayment mortgages than you will for an interest-only deal.
By comparison, interest-only mortgages don’t require you to repay the capital amount that you owe until the end of the mortgage term – they only require you to pay off the interest each month. This means you will still owe the original amount borrowed once your mortgage term has come to an end.
Interest-only mortgages are not cheaper than repayment mortgages overall, but they typically cost less each month.
To secure an interest-only mortgage, you will typically need a much larger deposit than you would for a standard repayment deal. Because these mortgages are seen as higher risk by lenders, the entry requirements are stricter.
While the "magic number" for most lenders is a 25% deposit (75% LTV), the amount you need can vary based on the lender's specific rules:
Standard requirement: Most high-street lenders require at least 25% to 40% of the property's value as a deposit.
Best rates: To access the most competitive mortgage rates, you may need a deposit of 40% or more.
Minimum equity: Many lenders also insist that you have a minimum amount of equity in the property, often between £200,000 and £300,000, if you plan to sell the home to repay the loan at the end of the term.
Specialist lenders: Some lenders may accept a smaller deposit (as low as 15%) in very specific circumstances, but this is rare for residential mortgages.
Lenders usually ask for a larger deposit for interest-only deals because:
The debt stays the same: Because you only pay the interest, the original amount you borrowed doesn't decrease over time.
The lender's risk is higher: Since your debt doesn't shrink, the lender's financial risk remains the same throughout the entire mortgage.
It protects against falling house prices: A larger deposit acts as a safety net. It reduces the chance of you owing more than the home is worth if property prices drop.
Yes, you can pay off your interest-only mortgage before the term ends, either by making small extra payments or by clearing the full balance at once.
Most lenders allow you to make overpayments on your interest-only mortgage. Because you aren't normally paying off the capital, any extra money you pay goes directly toward reducing the original loan amount. This can be a smart move because:
You save on interest: A smaller loan balance means you’ll be charged less interest each month.
You reduce your final debt: Every pound you overpay now is a pound you won’t have to find at the end of the term.
Before you make a large payment, check your mortgage deal for early repayment charges (ERCs). Many lenders allow you to pay off up to 10% of your mortgage balance each year for free, but if you go over this limit, they might charge you a fee.
If you have extra cash, overpaying on an interest-only mortgage can be very effective. However, always check your lender's specific limits first to avoid unnecessary fees.
If you reach the end of your interest-only mortgage term and you're unable to repay the loan using savings or another repayment strategy, you will need to sell the property.
If the property can't be sold for enough money to cover the loan, your other assets may be at risk.
It's very important to have a robust repayment plan in place when taking out an interest-only mortgage. You should check in on this regularly.
If you're worried about being able to repay the full loan at the end of the term, you might be able to switch to a repayment or part-and-part mortgage so that you can pay the borrowing amount back in smaller chunks.
Yes, many lenders allow you to switch your mortgage type, but whether you can do so depends on your lender’s rules and your financial situation.
If you want to move from a repayment mortgage to interest-only, your lender will treat this as a significant change. They will usually require:
A valid reason: This could be a temporary change due to financial difficulty or a permanent change if you have a high income.
A repayment plan: You must prove to the lender how you will pay back the original loan at the end of the term.
Low Loan to Value (LTV): You typically need a large amount of equity in your home to qualify for an interest-only switch.
Moving from an interest-only mortgage to a repayment deal is often more straightforward. Lenders generally encourage this because it reduces their risk, as you will start paying off the actual debt each month.
Keep in mind that your monthly payments will increase because you are now paying back both the interest and the loan amount.
It can be challenging to get an interest-only mortgage with bad credit. It may be easier to qualify for a part-and-part mortgage if you don’t want a full repayment mortgage.
It's very difficult for first-time buyers to get interest-only mortgages because lenders view them as higher risk. Most residential lenders only offer repayment deals to those starting out. You would typically need a very high income and a significant deposit (often 25% or more) to be considered.
Many lenders accept a pension as a "repayment vehicle," provided you can prove it will have enough value to clear the loan. Lenders will usually only look at the tax-free lump sum (typically 25%) you can take from your pension to ensure you aren't left without an income in retirement.
Beware that you may have to pay an early repayment charge (ERC). Check your terms and conditions carefully, and factor this in when choosing a lender.
An interest-only mortgage for a residential property can be a useful stop-gap if you are struggling to pay off your mortgage – for example, if you have been made redundant or need to take time off work. You can ask your lender to switch you to an interest-only arrangement while you get back on your feet. This can be a better option than having a mortgage repayment holiday where your interest will start to add up.
Also, interest-only mortgages are a popular option for buy-to-let investors. This is because it allows lower monthly repayments, meaning they can be sure the rental payments will cover at least 125% of them (which is usually the minimum requirement).
Retirement interest-only mortgages can also be an option if you're an older borrower. They allow you take out an interest-only mortgage on a property, and the capital is only repaid when you die or move into long-term care.
The alternatives to an interest-only mortgage are:
Part-and-part mortgage
Repayment mortgage
A part-and-part mortgage combines repayment and interest-only mortgages. You pay a portion, of your total borrowing amount through your monthly repayments. This means you'll have less to repay at the end of the mortgage term compared to taking out an interest-only mortgage.
However, you will still need to make sure you have a robust repayment strategy in place for when your mortgage term ends. It also means your monthly payments will be higher compared to a full interest-only mortgage.
A repayment mortgage means you pay the amount you borrowed back through your monthly repayments, in addition to the interest payments. This is how most residential mortgages work.It means that once you reach the end of your mortgage term, you'll have paid off what you borrowed and will own your property outright.
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This is when each monthly repayment pays off a portion of the amount borrowed, plus some interest. At the end of the mortgage term, you won't owe the lender any more money, and therefore you’ll own your house outright.
Repayment mortgages usually cost more each month, but less over the mortgage term. You'll normally find lower interest rates available for repayment mortgages than you will for an interest-only deal.
interest-only mortgages don’t require you to repay the capital amount that you owe until the end of the mortgage term, they only require you to pay off the interest each month. This means you'll still owe the original amount borrowed once your mortgage term has come to an end.
Interest-only mortgages are not cheaper than repayment mortgages overall, but they typically cost less each month.
This is when each monthly repayment pays off a portion of the amount borrowed, plus some interest. At the end of the mortgage term, you won't owe the lender any more money, and therefore you’ll own your house outright.
Repayment mortgages usually cost more each month, but less over the mortgage term. You'll normally find lower interest rates available for repayment mortgages than you will for an interest-only deal.
interest-only mortgages don’t require you to repay the capital amount that you owe until the end of the mortgage term, they only require you to pay off the interest each month. This means you'll still owe the original amount borrowed once your mortgage term has come to an end.
Interest-only mortgages are not cheaper than repayment mortgages overall, but they typically cost less each month.
