Is an Interest-Only Mortgage the Right Option for You?

Do You Know What Interest-Only Mortgages Are and How They Work? Discover the Requirements, the Rates, the Pros, Cons, and Whether It’s the Right Option for You. Read on to Find Out…
  • Last Updated: 06 Feb 2024
  • Fact Checked
  • Our team recently fact checked this article for accuracy. However, things do change, so please do your own research.


Francis Hui

Key Takeaways

  • Interest-only mortgages can offer lower monthly payments and greater flexibility, but carry the risk of higher overall costs and the need to repay the entire loan balance at the end of the term.
  • It allows you to pay only the interest on your loan each month, with the principal balance due at the end of the mortgage term.
  • Certain lenders in the UK do offer interest-only mortgages to individuals over 65, subject to specific criteria.
  • In the end, the total loan balance must be paid in full, typically through the sale of the property, savings, investments or another form of finance.
  • It can provide retirees with lower monthly payments and potentially free up cash, but they must ensure they have a solid plan to pay off the balance at the end of the term.

As a homebuyer, an interest-only mortgage could be just what you need to manage your finances better while lowering your monthly mortgage payments and freeing up your cash flow.

When considering the different types of equity release, this can be a great option for those who want to take advantage of lower monthly payments in the short term. 

However, it's crucial to understand how this type of mortgage works, what the benefits are, and what the potential drawbacks could be. 

In This Article, You Will Discover:

    Our expert team has all the answers to your most pressing questions, so keep reading to discover if an interest-only mortgage is the right option for you.

    What Are the Pros and Cons of Interest-Only Mortgages?

    Interest-only mortgages can be a viable option for financially astute borrowers. The primary benefit is lower monthly payments early on, as you're only required to pay the interest, not the principal.

    This can free up capital for other investments or necessities. Additionally, the mortgage interest is tax-deductible which can provide valuable tax savings.

    However, it requires discipline as the principal amount remains the same. However, interest-only mortgages also carry significant risks.

    The most notable is the payment shock when the interest-only period ends and payments increase significantly. Borrowers might struggle to manage this sudden hike.

    Also, building home equity takes longer as you aren’t paying down the principal.

    Lastly, these loans can come with higher interest rates, which can lead to paying more over the loan term. Hence, it's crucial to weigh these pros and cons carefully.

    What’s an Interest-Only Mortgage & How Does It Work?

    An interest-only mortgage is a type of home loan that allows the lender to pay only the interest on their loan for a set period. 

    With an interest-only mortgage, the monthly repayments cover only the interest on the loan as opposed to the loan itself. 

    This means that the repayments won’t reduce the size of the loan over the loan period, but that the sum of the loan won’t increase either.

    At the end of the loan term, the borrower will owe exactly what they borrowed and is required to pay back the loan, normally in 1 lump sum.

    Repayment methods typically include:

    • Cash savings or ISA 
    • Stocks and shares
    • Pensions 
    • Investment bonds
    • Unit trusts
    • The sale of the property itself
    • Other properties
    • Other assets

    Interest-Only Mortgage Explained

    An interest-only mortgage is best explained by this example: Let’s say that you apply for an interest-only mortgage of £100,000, at an interest rate of 6%, over a 25-year term. 

    The annual repayment will be £6,000, which equals £500 a month, which will be paid every month for the full term of 25 years.

    At the end of the 25-year term, the £100,000 that was initially borrowed still needs to be paid back. 

    *These figures are an example for indicative purposes only.

    Unlike a capital repayment mortgage, the mortgage term doesn’t decrease with your monthly payments and is required to be repaid at the end of the term. 

    What’s the Point of an Interest-Only Mortgage?

    The point of an interest-only mortgage is to allow the lender a short-term solution in which they’re able to take out a loan that requires smaller monthly repayments.

    This opens the borrower up to more liquidity in the short term.

    How Long’s the Term of an Interest-Only Mortgage?

    The standard length of an interest-only mortgage term in the UK is 25 years but can range from as little as a 3-year term.

    It’s worth noting

    The length of interest-only mortgage terms isn’t fixed and can depend on several variables and factors. 

    These would ultimately be taken into consideration by the lender and agreed upon by both parties.

    What’s the Longest Term for Interest-Only Mortgages?

    The longest term for interest-only mortgages is usually 25 years1, and it’s quite rare for lenders to offer this type of mortgage for longer.

    What Are the Requirements for Interest-Only Mortgages?

    The biggest requirement for interest-only mortgages is for you to demonstrate that you’ll be able to pay back the loan along with its interest. 

    Anyone who’s considered eligible by the lender in question can get an interest-only mortgage. 

    There are, however, strict criteria that need to be met for the applicant to be approved, and interest-only mortgages aren’t as pedestrian as repayment mortgages may be.

    Considering that the interest is to be paid back monthly, the applicant would need to have proof of a regular, monthly income accompanied by a tangible and accepted plan or investment to pay the loan back in a lump sum at the end of the term. 

    The main criteria for an interest-only mortgage are affordability in terms of paying the interest monthly, as well as a credible way to pay back the loan at the end of the term. 

    Different lenders will accept different forms of repayment vehicle types for the end of the term. 

    If you can prove your affordability and credibility to the lender, you may very well qualify for an interest-only mortgage.


    Overall mortgage approvals have seen a decline of 15% since July 20212, and it will ultimately be up to the discretion of the lender to establish whether you qualify for the mortgage or not.

    It’s always a good idea to consult a professional broker for their vital expertise. 

    Interest-Only Mortgages by Age

    Interest-only mortgages aren’t generally categorised in terms of the applicant’s age. 

    That means that there’s no minimum or maximum age requirement, and you can apply for an interest-only mortgage whether you’re at the start of adulthood or the end of your career. 

    That said, a Retirement Interest-Only (RIO) mortgage is an alternative type of loan that is aimed at older borrowers and may be an option as you get closer to retirement. 

    An RIO mortgage works the same as a normal interest-only mortgage with 2 primary differences:

    • The loan is only paid off when you pass on, move into long-term care, or sell the property.
    • You’re only required to prove that you can afford the monthly interest payments.

    And while there isn’t a minimum age requirement, or to even be retired for that matter, these mortgages are generally aimed at older borrowers. 

    Pros & Cons of Interest-Only Mortgages

    With any big commitment, weighing up the pros and cons is a great way to gauge whether you’re making the right decision. 

    Let’s take a closer look at the pros and cons of an interest-only mortgage.

    Pros of an Interest-Only Mortgage

    The pros of interest-only mortgages include smaller monthly payments, it’s more beneficial to buy-to-let owners and offers consumers flexibility in managing their finances. 

    Let’s take a closer look at each benefit:

    More Affordable Monthly Payments

    One of the biggest benefits of interest-only mortgages is that the monthly payments can be smaller relative to what a repayment mortgage would be, as you only need to pay the interest on the loan. 

    This frees up extra expenditure for other necessities, investments, or even luxuries.

    Good Option for Buy-To-Let Owners

    An interest-only mortgage can be a good option for buy-to-let landlords who plan to lease their properties. 

    The regular monthly payments landlords receive from their tenants can be put into savings to assist with paying back the full loan amount at the end of the term, making it a valuable investment vehicle. 

    Allows You to Budget & Invest Your Savings

    With an interest-only mortgage, you have the opportunity to budget and save on your mortgage repayments. 

    The money saved by not repaying the loan could be used for other long-term investments that may assist in paying back the mortgage debt eventually.

    Cons of Interest-Only Mortgages

    The cons of interest-only mortgages are that they can work out to be more expensive, it’s considered a riskier loan and therefore harder to obtain approved, and there’s always a possibility of a shortfall. 

    We discuss each major drawback in more depth: 

    Can Be More Expensive in the Long Run

    With an interest-only mortgage, the capital you owe doesn’t decrease over time, which means that the interest you pay doesn’t decrease either. 

    This results in paying back more in overall interest, which could be more expensive in the long run.

    Banks Consider It “High-Risk”

    Even though there’s a 17% uptake in borrowers repaying their loans on time or ahead of time, banks and lenders still view interest-only mortgages as high-risk loans3.

    Since the lender is required to pay back 1 large payment at the end of the loan term, the lender isn’t always guaranteed that the repayment will realise.

    Big Risk of Shortfalls

    While you may, and should, plan how you’ll pay the loan bank at the end of the term, there’s no guarantee that your repayment vehicle will pan out the way that you forecasted. 

    This could leave you falling short of paying the lump sum back, and you may need to look at alternatives like selling the property or remortgaging if it’s an option.

    Limited Increases in Equity of Your Home

    As the outstanding mortgage of the property remains the same over the term of the loan, the equity of the home won’t increase unless significant improvements are made (likely, but never guaranteed). 

    What Are the Costs of an Interest-Only Mortgage?

    The cost of an interest-only mortgage is essentially the interest on the mortgage. 

    Just as with any loan, the lender will need to be compensated for their service, and in this case, it’s the monthly interest payment.

    How’s an Interest-Only Mortgage Calculated?

    An interest-only mortgage is calculated based on the interest rate relative to the outstanding initial loan balance. 

    Because you don’t pay off the initial loan but only the interest, the monthly payment won’t change during the interest-only period of the mortgage.

    What Are Interest-Only Mortgage Rates?

    Interest-only mortgage rates are relative to the circumstances that the borrower is faced with. 

    It’ll ultimately depend on the lender as well as market conditions what the rates of an interest-only mortgage will be, and it is, therefore, unfeasible to put any monetary numbers here.

    Are Interest-Only Mortgages Fixed?

    Interest-only mortgages can be fixed or they can have a variable rate. 

    With a fixed rate, an interest-only mortgage’s repayment will remain the same throughout the entire term of the loan. 

    A variable interest-only mortgage will have an interest rate that could periodically change based on market conditions.

    Is an Interest-Only Mortgage Safe?

    Yes, an interest-only mortgage is safe when the best interests of the borrower are considered. 

    As any interest-only mortgage is considered high-risk, lenders only allow loans to those they’re confident in paying back. 

    Therefore, the absence of reckless approval from respective lenders means that an interest-only mortgage is safe for those who get approved. 

    How Are Interest-Only Mortgages Regulated?

    Interest-Only Mortgages are regulated by the Financial Conduct Authority (FCA)4.

    The FCA must authorise any interest-only mortgage before the lender can approve it.

    What’s the FCA’s Role in Interest-Only Mortgages?

    The FCA regulates all types of loans in the UK. 

    Since, at its core, an interest-only mortgage is a type of loan, the FCA would need to authorise it prior to the lender granting it.

    What Happens at the End of an Interest-Only Mortgage?

    At the end of an interest-only mortgage, the borrower is required to pay back the initial loan amount in full. 

    What Can I Do if I Can’t Pay Off My Interest-Only Mortgage?

    If you can’t pay off your interest-only mortgage at the end of the term, you have a number of options available to mitigate the situation.

    Let’s take a look at these options:

    • Extend the mortgage term: You can reach out to your lender to discuss a possible extension of your term to postpone the repayment period.
    • Remortgage with a new lender: You could approach a new lender to take out a new mortgage on your property. 
    • Equity release: If you’re over 55, you may have the option of releasing equity in your property without having to sell it. Consult your broker for the appropriate advice in this regard.
    • Sell the property: If all else fails, you can sell the property and use the proceeds to pay off the loan. 

    Common Questions

    Why Would You Get an Interest-Only Mortgage?

    What’s the Difference Between an Interest-Only Mortgage and a Repayment Mortgage?

    Can I Increase My Interest-Only Mortgage Term?

    Are Buy-To-Let Interest-Only Mortgages Available?

    Is There an Age Limit on an Interest-Only Mortgage?

    Can I Apply for an Interest-Only Mortgage as a First-Time Buyer?

    What Happens When the Interest on an Interest-Only Mortgage Is Paid in Full?

    Can I Change My Interest-Only Mortgage to Capital Repayment?

    Can I Change My In Capital Repayment Mortgage to an Interest-Only Mortgage?

    Will I Be Charged to Change From an Interest-Only Mortgage to a Capital Repayment Mortgage, or Vice Versa?

    Where Can I Get an Interest-Only Mortgage?

    How Do I Choose the Right Interest-Only Mortgage Provider?

    Do Interest-Only Mortgages Still Exist?

    Can You Get an Interest-Only Mortgage in The UK?

    Can You Get an Interest-Only Mortgage With Nationwide Building Society?

    Can You Get an Interest-Only Mortgage With Santander?

    What Are the Pros and Cons of Interest Only Mortgages?

    How Does an Interest Only Mortgage Work?

    Can You Get an Interest Only Mortgage Over 65 in the UK?

    What Happens at the End of an Interest Only Mortgage Term?

    Are Interest Only Mortgages a Good Idea for Retirees?

    In Conclusion

    An interest-only mortgage can be a good idea for borrowers who are looking to reduce their monthly mortgage payments in the short term while increasing their cash flow at the same time.  

    However, it’s imperative to bear in mind that an interest-only mortgage isn’t a fixed solution for repaying a large loan over a period of time and has an element of risk to it.

    As with any big financial decision, borrowers must carefully weigh the benefits against the drawbacks before undertaking a loan of this nature. 

    The best practice would be to consult a knowledgeable mortgage professional beforehand to help determine if this type of loan is the best option for your unique financial situation. 

    Always remember to do your research and due diligence to ensure you understand all the terms and conditions of an interest-only mortgage before making such a trying commitment.

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