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        A Complete Guide to Interest-Only Mortgages

        Looking for an interest only mortgage? It can be easier than you might think! Find out how to satisfy the interest only mortgage criteria in our expert guide.

        Are you looking for an interest only mortgage?

        No impact on your credit score

        Interest-only mortgages are slightly more complex than their capital and repayment counterparts but, for some borrowers, they could fit the bill.

        This guide will tell you everything you need to know about these types of mortgages, how they differ from the repayment version, which lenders offer them and where to look if you need help finding the best one for you.

        What is an interest-only mortgage?

        An interest-only mortgage is a type of home loan where you only pay off the interest each month, rather than a portion of the capital as well – although you may be able to arrange voluntary capital repayments, if you wish.

        This means the actual mortgage debt remains untouched and isn’t repaid until the end of the mortgage term, when a pre-agreed repayment vehicle is used to clear the full loan amount.

        The main advantage is the monthly repayments are much lower, as you’re not repaying any part of the original amount borrowed, just the interest.

        However, this also means you must have an alternative repayment method in place to cover this amount by, if not before, the end of the term.

        Are they still available for residential properties?

        Yes, they’re still very much available. Although they tend to be the most popular choice for people looking at buy-to-let properties, some lenders are happy to offer them to residential buyers who can evidence a strong enough repayment vehicle.

        Interest-only mortgages aren’t for everyone and it’s essential to speak with an experienced broker before deciding which type of home loan is right for you.

        Get Started with a Broker

        Maximise your chance of approval with specialist advice from an expert in Interest Only Mortgages.

        Types of repayment vehicle

        A repayment vehicle is often referred to as an ‘exit plan’ and, as the name suggests, is your means to repay the full loan amount at the end of the term.

        You’ll need this in place before a lender will approve offering your interest-only mortgage.

        The repayment vehicle is a separate arrangement to your mortgage but runs alongside.

        It can basically be anything you like – as long as your lender accepts its validity – and is often in the form of an investment, such as:

        Whichever exit strategy you choose, the key aim is that the accumulated returns will leave you with enough to repay your original loan at, or even before, the end of the mortgage term.

        There are other potential repayment vehicles for interest-only mortgages too. A popular option is to simply sell the property at the end of the mortgage term, hopefully making a profit on the original amount paid.

        Alternatively, you may be planning on remortgaging to a repayment deal in a few years’ time, perhaps only using an interest-only product as a short-term solution to benefit from lower repayments.

        The key thing to remember is that there’s no guarantee with any repayment vehicle.

        Your investments may not perform well enough to repay the full loan amount or your circumstances could change and mean that remortgaging isn’t an option.

        Interest-only vs. repayment mortgages

        If interest-only mortgages are exactly as they sound – where only interest is paid each month – so too are repayment mortgages, where your monthly payments include a portion of the loan as well as interest, so the full amount is guaranteed to be repaid by the mortgage end date.

        The biggest difference, at least for borrowers’ finances, is in terms of the monthly payments, which will be far higher for a repayment mortgage as you’re chipping away at the capital as well.

        Let’s say you’ve got a mortgage of £200,000 with an interest rate of 2% and a term of 25 years. In the interest-only arrangement, your monthly repayments would be just £333 (at an interest rate of 2% your annual interest would be £4,000, equating to £333 per month). In the repayment scenario, you’d be paying £848 per month.

        Try our calculator below to get an idea of how your repayments could differ on a repayment mortgage versus an interest-only deal.

        calculator icon

        Mortgage Repayment Calculator

        Our mortgage repayment calculator can tell you how much your mortgage will cost you each month and overall. Enter the amount you’re borrowing, the term length and interest rate, and our calculator will do the rest.


        Enter the amount you're borrowing
        £
        2.5% is an average figure but the rate you get may vary
        %
        25 years is average, but most lenders offer longer and shorter terms
        years

        Monthly Repayments:

        Total amount paid at end of term:

        Get started with an expert broker to find out how much they could help you save on your mortgage repayments.

        Though the lower repayments of an interest-only mortgage may initially seem appealing, the clear downside is that you’re not actually paying off any of the loan, and there’s no guarantee that you’ll be able to clear it at the end of the term.

        Other key differences would be:

        • As the value of an interest-only loan is never reducing, you may actually end up paying more interest over the term of the mortgage.
        • With a repayment mortgage, as the capital reduces your level of equity increases, potentially giving you access to lower rates throughout the term of the loan
        • The more defined repayment structure makes capital and repayment mortgages seem much less risky and, generally, more appealing to the wider market

        Can you switch to a repayment mortgage at a later date?

        Yes. If you’re approaching the end of your interest-only mortgage term and find you’re unable to repay the loan, you may be able to remortgage to a repayment arrangement, though this will depend on several factors including your age and credit profile.

        Of course, you may simply want to switch to a repayment mortgage by choice, perhaps because your circumstances have changed and you’ve got additional income to cover higher monthly repayments. Either way, make sure to speak to a mortgage broker who can take you through your options.

        Can you get a part repayment/part interest mortgage?

        Yes, it’s possible. Part repayment/part interest mortgage offer an attractive ‘halfway house’ option. In this setup you’ll be repaying the interest and some of the loan amount, but not all of it, and will still have a lump sum at the end of the term that you’ll need to repay.

        This means you’ll still need to have a repayment strategy to repay the remaining capital, but you won’t need to find quite as much cash as with a pure interest-only deal.

        Monthly repayments can be lower than with a repayment mortgage, too, which could offer the ideal compromise for some borrowers.

        Try our calculator below to work out what your repayments could look like if you choose this option.

        calculator icon

        Part and Part Mortgage Calculator

        This calculator will work out what your mortgage payments will be on an agreement that’s part interest only and part capital repayment. Simply enter the full loan amount and the portion of the debt that will be interest only, along with the interest rate and term length, and our calculator will do the rest.


        Enter the amount you're borrowing
        £
        Enter the total amount required on interest only
        £
        Must be less than the loan amount
        2.5% is roughly average you can enter a custom percentage
        %
        25 years is average, but most lenders offer longer and shorter terms
        years

        Monthly Repayments:

        Monthly Interest Payments:

        Monthly Total Payments:

        Now that you have a rough idea of what your monthly repayments could look like, speak to a mortgage broker to find out how much they could help you save each month and overall.

        How to get an interest-only mortgage

        Think an interest-only mortgage might be for you?

        Here’s some simple steps you can take to make the application process much more straightforward:

        1. Get your documents together. Getting your documentation together beforehand can save you a lot of time during the process. In addition to your ID/ proof of address, evidence of earnings etc. – crucially for this kind of mortgage – this includes evidence of how you’ll repay the loan at the end of the term.
          This could be details of an endowment policy, for example, a statement of your investment account or stocks and shares ISA, or a mortgage statement of your buy-to-let property. Whatever you intend to use as your mortgage repayment vehicle, make sure to have the necessary details to hand.
        2. Check your credit score. Your credit score is key in any mortgage search.
          A clean credit record is essential if you’re to have access to the best interest-only mortgage rates. Checking your credit score in advance allows you to amend any incorrect or invalid information and avoid any nasty surprises during your application; head to our credit check hub to get started.
        3. Speak to a broker. The specialist nature of interest-only deals means speaking to an expert broker can be invaluable.
          They’ll have a thorough understanding of the market and the lenders who operate within it, and will be able to use that knowledge to get you the best terms that suit your circumstances.
          They’ll be able to offer advice and support throughout the process too, and with our broker matching service, you can take the hassle out of finding an expert that can help. If you make an enquiry we can arrange for an advisor we work with to contact you directly.

        Our Broker-Matching Service Guaranteed!

        We want you to have complete confidence in our service, and get the best chance of securing your mortgage. We guarantee to get your mortgage approved where others can’t – or we’ll give you £100*

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        Eligibility criteria

        Because they come with an extra element of risk when compared with standard repayment mortgages, interest-only mortgage criteria tends to be stricter.

        How much deposit do you need?

        You’ll typically find that deposit requirements will be higher, with most lenders only offering interest-only mortgages at up to 75% loan-to-value (LTV), with some topping out at just 50%.

        There are exceptions – some lenders will increase this to 80% or even 85%, but your application will need to be strong in all other areas.

        How much income will you need?

        Income requirements can often be significantly higher as well – some lenders expect at least one applicant to be earning a minimum of £75,000, or even as much as £100,000.

        There are exceptions, but in many cases this puts interest-only residential mortgages out of reach of many borrowers and means they’re often only suitable for higher earners, who may be more able to arrange suitable repayment vehicles as well.

        Your repayment vehicle

        Your exit strategy will need to be set in stone before your application will be approved, and you’ll normally be contacted throughout the term of the mortgage to make sure that this remains on track.

        Not all lenders will accept the sale of the property as a suitable repayment vehicle – if this is your preferred route, make sure to speak to a broker who knows the lenders that you’re best approaching and, crucially, the ones who won’t consider your application.

        Which lenders are available?

        Though there are several lenders able to offer interest-only mortgages, because of the stricter eligibility requirements, they may not be readily available to all borrowers.

        Increasingly, it tends to be specialist lenders who’re more willing to consider applications for this type of home loan.

        For example, although NatWest, Barclays, HSBC, Nationwide and Virgin Money all offer interest-only deals, they’re restricted to those earning at least £75,000 (or £100,000 in the case of HSBC), which means it’s often necessary to seek smaller providers.

        Many of the best interest-only products are only available via brokers, too, with the specialist and high-risk nature of these mortgages meaning a lot of lenders expect you to seek suitable advice before committing to this kind of agreement.

        This is where we can help! With our network of advisors, we’ll be able to point you in the direction of the lenders best placed to accommodate your needs.

        How to find the best rates

        Many of the best interest-only mortgage rates are only available via brokers, who will also be able to advise you on the term that would be right for you.

        For example, 2 year fixed rates may be readily available, but will they be better than a 5 year fixed, or perhaps a variable rate deal?

        Other borrowers may want the security of a 10 year fixed rate, but will it be the most cost-effective over the long term?

        The only way to know for sure is to speak to an advisor who will be able to scour their network and negotiate on your behalf, finding the mortgage rate that’s perfect for your needs.

        What types of interest-only mortgages are available?

        Getting an interest-only mortgage on a residential property is becoming less common these days, but it’s certainly still an option for those who meet the criteria.

        Some lenders are able to offer an interest-only arrangement on any of their residential mortgage deals, so it’s worth speaking to a broker to consider your best options.

        Interest-only deals are arguably more common in the buy-to-let sector, where borrowers will often use the future sale of the property itself as the repayment vehicle, fully intending to sell it when the mortgage ends in order to repay the loan.

        This means they can benefit from lower repayments than with a capital repayment deal, and because they’ll have their own home and won’t have any emotional attachment to the buy-to-let, they can sell it on with little concern.

        However, remember that not all lenders will accept property sale as the repayment strategy, so make sure you know who to approach.

        RIO mortgages are interest-only deals that are offered to those in retirement, usually when their previous mortgage deal comes to an end.

        Unlike with standard interest-only loans, which often have a maximum age limit, there’s no such restriction when it comes to RIO mortgages.

        Provided you can prove you’re able to cover the interest payments and have a solid repayment strategy in place – which in this case is often sale of the property, either on death or when the borrower moves into long-term care – it can be a useful tool for borrowing in later life.

        What happens if you can’t pay off your interest-only mortgage?

        There may be occasions where you’re approaching the end of the mortgage term and find you don’t have the means to repay the loan.

        Perhaps your investments haven’t performed as well as you’d hoped, or the housing market has fallen and selling the property won’t repay the loan.

        In any scenario where you’re unable to repay the full amount, you have a few options open to you:

        • Sell another property (perhaps a buy-to-let or second home)
        • Ask your provider for an extension
        • Remortgage, perhaps to a full repayment product
        • Use your pension (if applicable)
        • Switch to a retirement interest-only deal or opt for equity release (if you meet the age criteria)
        • Downsize to a smaller property

        There may be other solutions available as well depending on your circumstances, but with any option the key is to speak to your provider as soon as you know you may be facing difficulties, even if you’re years away from your mortgage end date.

        That way you can put a plan in motion ahead of time, and hopefully won’t be facing the more extreme steps of repossession or loss of additional assets, which can be a possibility if all other routes fail. If you think this could be on the cards, make sure to seek suitable advice.

        Speak to a broker who specialises in interest-only mortgages

        Finding the right broker can sometimes be just as challenging as finding the ideal mortgage, but at Online Money Advisor we make it very simple.

        By letting us know your requirements we’ll scour our broker network to put you in touch with an expert interest-only mortgage specialist that can manage your application from start to finish, leaving you with the deal that’s right for you. Call 0808 189 0463 to get started or make an enquiry.

        Get Started with a Broker

        Maximise your chance of approval with specialist advice from an expert in Interest Only Mortgages.

        FAQs

        Yes, though the higher income and deposit requirements of interest-only mortgages mean they’re not always suitable for those taking their first steps on the ladder.

        You can, but it will be more difficult, and the trade-off is that you’ll likely be offered higher rates and less favourable terms.

        Not all lenders will be willing to take on this extra element of risk, either, which makes it even more important to speak to a broker ahead of time so you know who to approach to stand the best possible chance of success, and avoid the possibility of a rejection damaging your credit score even further.

        In some cases, a lender may accept periodic lump sum payments as the repayment vehicle, though this will usually need to be on an annual basis and agreed in advance. The lender will need to see evidence of where these payments will come from.

        It depends on the lender and your individual circumstances.

        While a lot of lenders will consider converting to an interest-only deal in the current climate, you’ll need to speak with them directly to discuss your needs and the payment challenges you’re currently facing to see if an agreement can be reached.

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        Pete Mugleston

        Pete Mugleston

        Mortgage Expert, MD

        About the author

        Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes. The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.

        Pete’s presence in the industry as the ‘go-to’ for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for OMA of course!

        FCA Disclaimer

        *Based on our research, the content contained in this article is accurate as of the most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us as well as any of our own are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs.

        Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.