Is an Interest-Only Mortgage the Best Option for Your Financial Goals?

Interest only mortgages require monthly interest payments with the principal due at term's end, offering a different approach to managing home equity compared to the potentially growing debt of equity release plans.
  • Last Updated: 17 May 2024
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Francis Hui
Do You Know What Interest-Only Mortgages Are and How They Work? Discover the Requirements, the Rates, the Pros, Cons, and Whether It Is the Right Option for You. Read On…
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Key Takeaways…

  • Interest-only mortgages result in lower monthly expenses and more flexibility, but keep an eye out for the end-term lump-sum payback, which requires a sound pay-off strategy like selling your home, using savings, or finding alternative financing.
  • Each month, you’re just covering the interest, leaving the big balance for the term’s end.
  • Know your mortgage inside out, including how to switch to a repayment plan if the going gets tough, and stay in sync with your lender or advisor to keep your repayment plan on target and potentially tweak it as life changes.

As a homebuyer, an interest-only mortgage could be just what you need, considering it allows borrowers to manage finances better while lowering monthly mortgage payments and freeing up 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 is 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 the answers to your most pressing questions, so keep reading to discover if an interest-only mortgage is the right option for you.

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    Understanding Interest-Only Mortgages

    How Does an Interest-Only Mortgage Function in the UK?

    In the UK, an interest-only mortgage functions by requiring borrowers to pay just the interest monthly, leaving the principal until the term ends.

    How Does an Interest-Only Mortgage Work in the UK?

    An interest-only mortgage is a type of home loan that works by allowing 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 will not reduce the size of the loan over the loan period, but that the sum of the loan will not 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 one 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

    What Is an Interest-Only Mortgage Explained in Detail?

    An interest-only mortgage is best explained by this example: If you apply for an interest-only mortgage of £100,000, at an interest rate of 6%, over a twenty-five-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 twenty-five years.

    At the end of the twenty-five-year term, the £100,000 that was initially borrowed still needs to be repaid. 

    *These figures are an example for indicative purposes only.

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

    Why Choose an Interest-Only Mortgage?

    Choosing an interest-only mortgage offers lower monthly payments, focusing solely on interest, making it appealing for those with strategic investment plans for capital repayment.

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

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

    What Is the Longest Term for an Interest-Only Mortgage in the UK?

    The longest term for an interest-only mortgage in the UK can vary, often extending up to twenty-five years, but can range from as little as a three-year term, providing borrowers with extended flexibility in their financial planning.


    The length of interest-only mortgage terms is not 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.

    How Long Can You Have an Interest-Only Mortgage in the UK?

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

    How Can You Compare Interest-Only Mortgages, and What Are the Key Factors?

    When comparing interest-only mortgages, consider the interest rate, fees, and flexibility in terms of overpayments and underpayments.

    The interest rate will dictate your monthly payments, whilst fees can significantly affect the total cost over the mortgage term.

    Flexibility is crucial for adapting to changing financial circumstances.

    Additionally, understanding the lender’s criteria for the repayment strategy at the end of the mortgage term is essential.

    Comparing these factors across different lenders can help secure a mortgage that aligns with your financial goals and repayment plan.

    What Financial Implications Do Interest-Only Mortgages Have?

    Interest-only mortgages impact finances by requiring payments on the interest without reducing the principal, potentially affecting long-term wealth and property ownership strategies.

    What Are the Benefits and Drawbacks of Interest-Only Mortgages?

    Interest-only mortgages offer lower initial payments with significant flexibility but pose risks of higher long-term costs and require robust repayment plans for the principal amount.

    A closer look at the pros and cons of an interest-only mortgage…

    What Are the Advantages of Choosing an Interest-Only Mortgage?

    The advantages of choosing an interest-only mortgage include smaller monthly payments. It is more beneficial to buy-to-let owners and offers consumers flexibility in managing their finances. 

    A closer look at each benefit…

    Why Are Monthly Payments More Affordable with an Interest-Only Mortgage?

    Monthly payments are more affordable with an interest-only mortgage as they 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 finances for other necessities, investments, or even luxuries.

    Is an Interest Only Mortgage a Good Choice 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, as 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. 

    How Does an Interest-Only Mortgage Allow You to Budget and Invest?

    With an interest-only mortgage, you will be allowed to budget, invest, and save, as 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.

    What Are the Disadvantages of Interest-Only Mortgages?

    The disadvantages of interest-only mortgages are that they can be more expensive. It is considered a riskier loan and therefore harder to get approved, and there is always a possibility of a shortfall. 

    Each major drawback in more depth… 

    Why Can Interest-Only Mortgages Be More Expensive Over Time?

    Interest-only mortgages can be more expensive over time because the capital you owe does not decrease over time, which means that the interest you pay does not decrease either. 

    This results is repaying more in overall interest, which could be more expensive in the long run.

    Why Do Banks Consider Interest Only Mortgages High-Risk?

    Banks and lenders still view interest-only mortgages as high-risk loans because the lender is required to pay back one large payment at the end of the loan term, and the lender is not always guaranteed that the repayment will be realised.

    This is despite there being a 17% uptake in borrowers repaying their loans on time or ahead of time.3

    What Are the Risks of Shortfalls with Interest-Only Mortgages?

    The main risk of interest-only mortgages is the potential shortfall in repaying the capital at term end, requiring a solid repayment strategy to avoid financial strain.

    Whilst you plan how you will repay the loan at the end of the term, there is no guarantee that your repayment vehicle will pan out the way you forecasted. 

    This could leave you falling short of repaying the lump sum, and you may need to look at alternatives like selling the property or re-mortgaging if that is an option.

    Why Is There Limited Equity Increase in Your Home with an Interest-Only Mortgage?

    With an interest-only mortgage, equity growth in your home can be limited due to the absence of capital repayment, focusing only on interest payments.

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

    What Are the Interest-Only Mortgage Rates and Costs in the UK?

    Interest-only mortgage rates and costs in the UK vary, reflecting borrowers’ financial status, lender policies, and prevailing market conditions.

    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 is the monthly interest payment.

    How Is an Interest-Only Mortgage Calculated in the UK?

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

    Because you do not pay off the initial loan but only the interest, the monthly payment will not change during the interest-only period of the mortgage.

    What Are the Current Interest-Only Mortgage Rates in the UK?

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

    It will 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.

    Can You Obtain a Fixed-Rate Interest-Only Mortgage in the UK?

    Interest-only mortgages can be fixed or 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.

    Who Can Access Interest-Only Mortgages in the UK?

    Access to interest-only mortgages in the UK is governed by specific eligibility criteria, including income, age, and repayment strategy.

    What Are the Qualifying Criteria for an Interest Only Mortgage?

    The biggest requirement for interest-only mortgages is for you to demonstrate that you will be able to repay the loan along with it’s interest. 

    Anyone who is considered eligible by the lender in question can obtain an interest-only mortgage. 

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

    Considering that the interest is to be repaid monthly, the applicant would need to prove regular, monthly income accompanied by a tangible and accepted plan or investment to repay the loan in a lump sum at the term’s end. 

    The main criteria for an interest-only mortgage are affordability in terms of paying the interest monthly, as well as a credible way to repay 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 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.

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

    Are There Age Restrictions for Interest Only Mortgages in the UK?

    In the UK, interest-only mortgages come with age restrictions, often determined by lenders to ensure repayment feasibility within the borrower’s lifetime.

    That means that there is no minimum or maximum age requirement, and you can apply for an interest-only mortgage whether you are 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 two primary differences…

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

    Whilst there is not a minimum age requirement or even retirement for that matter, these mortgages are generally aimed at older borrowers. 

    How Can Remortgaging Benefit You With an Interest-Only Plan?

    Remortgaging to an interest-only plan can benefit you by providing financial flexibility and potentially lowering monthly outgoings for UK homeowners.

    How Can You Benefit From an Interest Only Remortgage in the UK?

    You can benefit from an interest-only re-mortgage in the UK as it allows you as a homeowner to repay only the interest on the loan monthly, without reducing the principal amount.

    This can result in significantly lower monthly payments compared to a standard repayment mortgage, providing financial flexibility.

    Particularly appealing for those with fluctuating incomes or seeking to allocate funds towards other investments, interest-only remortgages can also be a strategic tool for property investors looking to maximise rental yields.

    However, it is crucial to have a robust repayment plan for the loan’s principal at the end of the term to avoid financial pitfalls.

    Is a Fixed-Rate Interest-Only Mortgage Right for You in the UK?

    A fixed-rate interest-only mortgage could be right for you as it offers the certainty of consistent interest payments throughout the fixed-rate period, which is beneficial in a fluctuating interest rate environment.

    This predictability aids in financial planning, particularly for investors or individuals with fixed budgets.

    However, it is important to assess whether this stability aligns with your financial objectives and repayment strategy, especially considering potential rate changes once the fixed period expires.

    Evaluating your long-term financial goals, the likelihood of rate fluctuations, and your risk tolerance is crucial in determining if a fixed-rate interest-only mortgage suits your needs.

    What Should You Do at the End of Your Interest-Only Mortgage Term?

    At the term’s end of your interest-only mortgage, borrowers should repay the principal, potentially through selling the property, remortgaging, or using savings.

    What Occurs When an Interest-Only Mortgage Term Ends in the UK?

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

    What Should You Do If You Can Not Repay Your Interest-Only Mortgage?

    If you are unable to repay the principal at the end of an interest-only mortgage term, it is essential to act promptly.

    Contacting your lender to discuss your circumstances can lead to potential solutions, such as extending the mortgage term, switching to a repayment mortgage, or arranging a sale of the property.

    Financial advice is vital in such situations to explore all available options, including government schemes or financial products designed to assist homeowners in distress.

    Proactive communication and expert guidance are key to navigating this challenging scenario effectively.

    What Options Are Available If You Can Not Repay Your Interest-Only Mortgage?

    If you can not repay your interest-only mortgage at the end of the term, you have several options available to mitigate the situation.

    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 are 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 repay the loan. 

    How Safe Are Interest-Only Mortgages in the UK?

    Interest-only mortgages are 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 are confident in repaying. 

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

    What Regulations Govern Interest-Only Mortgages in the UK?

    Interest-only mortgages are regulated in the UK by the Financial Conduct Authority (FCA)4.

    How Does the FCA Regulate Interest-Only Mortgages?

    The FCA regulates all types of loans in the UK, and since an interest-only mortgage is a type of loan, the lender must be authorised and regulated in the UK by the FCA before it may grant any loans to consumers.

    How Can You Strategically Manage and Repay an Interest-Only Mortgage?

    Strategic management of an interest-only mortgage involves robust planning for the principal repayment and monitoring of the investment strategy.

    What Are Effective Strategies to Repay Your Interest-Only Mortgage?

    To effectively repay an interest-only mortgage, start by establishing a clear repayment plan for the principal amount.

    Investing in savings or investment products that align with the mortgage term can build a lump sum for repayment.

    Regularly reviewing and adjusting your investment strategy is crucial to ensuring it remains on track to meet the mortgage’s end-date requirements.

    Additionally, making occasional overpayments, if your mortgage terms allow, can reduce the principal amount, easing the end-term repayment burden.

    Engaging with a financial advisor can provide personalised strategies based on your financial situation.

    Frequently Asked Questions on Interest-Only Mortgages

    Why Would You Obtain an Interest-Only Mortgage?

    What Is 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 Obtain an Interest-Only Mortgage in The UK?

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

    Can You Obtain 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 Obtain 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?

    Concluding Thoughts on Interest-Only Mortgages in the UK

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

    However, it is imperative to consider that an interest-only mortgage is not 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 consider 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 committing.

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