Interest-Only Mortgages UK: How They Work

How do interest-only mortgages work?

With an interest-only mortgage, your monthly payments cover only the interest charged on the loan. You do not repay any of the capital (the amount originally borrowed) during the mortgage term. At the end of the term, you must repay the full original loan amount in a single lump sum.

For example, if you borrow £250,000 on a 25-year interest-only mortgage at 5%, your monthly payments would be approximately £1,042. At the end of 25 years, you still owe £250,000. On a repayment mortgage at the same rate, monthly payments would be approximately £1,461, but the loan would be fully repaid by the end of the term.

The lower monthly payments are the main attraction of interest-only mortgages — in this example, £419 per month less. However, the trade-off is that you need a credible plan to repay the capital at the end.

Who can get an interest-only mortgage?

Interest-only mortgages have become much harder to obtain since the financial crisis. Most mainstream lenders now require:

• A large deposit: Typically a minimum of 25% deposit, with many lenders requiring 40–50%. Very few lenders offer interest-only at above 75% LTV
• High income: Many lenders set a minimum income threshold of £75,000 or even £100,000
• A credible repayment strategy: You must demonstrate how you will repay the capital at the end of the term
• Proof of assets: Some lenders require evidence of existing investments or other property

Interest-only is effectively restricted to wealthier borrowers and buy-to-let investors. First-time buyers will find it extremely difficult to obtain an interest-only residential mortgage.

Acceptable repayment strategies

Lenders will want to see a realistic plan for repaying the capital. Commonly accepted strategies include:

• Sale of the mortgaged property: Planning to downsize and use the proceeds, though this depends on future property values
• Sale of another property: If you own additional property
• Investments: ISAs, stocks and shares, or other investment portfolios. Lenders may require evidence of existing investments on track to reach the target amount
• Pension lump sum: Using the 25% tax-free lump sum from your pension at retirement
• Endowment policies: Less common now but still accepted if in place

Risks of interest-only mortgages

The main risk is reaching the end of your mortgage term without enough money to repay the capital. This is not a theoretical concern — thousands of UK borrowers on interest-only mortgages face a repayment shortfall. Other risks include:

• Investment underperformance: If your repayment vehicle does not grow as expected
• Property value decline: If relying on property sale and values fall
• Complacency: The lower monthly payments can make it easy to avoid thinking about the eventual capital repayment
• Lender pressure: Lenders may contact you as the end of the term approaches to ask about your repayment plan, and may require you to switch to repayment if they are not satisfied

Part-and-part mortgages

A part-and-part mortgage combines interest-only and repayment elements. For example, you might pay interest-only on £150,000 and repay capital on £100,000. This keeps monthly payments lower than full repayment while reducing the capital you need to repay at the end. Many lenders offer part-and-part arrangements with more flexible eligibility criteria than full interest-only.

Interest-only for buy-to-let

Interest-only remains the standard mortgage type for buy-to-let investors. The logic is that rental income covers the interest payments, while the property itself appreciates in value over time to provide the capital repayment. Buy-to-let interest-only mortgages are more widely available and have less restrictive criteria than residential interest-only.

Get expert help with your mortgage

Whether you are considering an interest-only mortgage, already on one and need to plan for repayment, or want to explore switching to repayment, specialist mortgage advice is essential. Nesto matches you with experienced mortgage brokers who can assess your options and find the right solution for your circumstances.