Interest Only Mortgages Explained

An interest-only mortgage is a type of home loan where you only pay the interest each month, with the full loan amount repaid at the end of the term. They are particularly popular among buy-to-let investors, as the lower monthly repayments can help maximise rental income while the loan balance is repaid at the end of the term.

In this guide, we’ll explore the availability of interest-only mortgages, their key uses, and how to secure the best deal for your needs. For more related articles, visit our Interest-Only Mortgages page. If you’re considering other mortgage options, you may also find our complete guide to mortgages helpful for understanding alternatives like fixed, tracker, and variable rates.

What is an interest-only mortgage?

As you might expect, an interest-only mortgage is a home loan whereby only the interest is repaid monthly throughout the term. At the end of the mortgage term, you’ll still owe the full amount borrowed, which will need to be paid in full at this point.

Whilst this can be a great way to keep costs low throughout the mortgage, as monthly payments will be significantly lower than repaying capital and interest together, you will pay more overall.

This is because mortgage interest is charged on the total amount you owe, and as the amount you owe doesn’t reduce, the interest charged will not change either.

You must have an effective repayment vehicle (loan repayment method) to repay the lender the original capital borrowed at the end of the term. A typical term is around 25 years. However, in most cases, the lender must agree with your repayment strategy as part of the application process. Each lender has its list of acceptable repayment vehicles, which can range from the property’s resale to investments and savings.

How to get an interest-only mortgage

Your first step should be to find a specialist mortgage broker with experience arranging interest-only mortgages. This will boost your chances of getting approved at the best terms available.

Using our broker-matching service, you can speak directly with the right broker by simply making an enquiry online.

They’ll be able to help with:

• Readying all the necessary paperwork
• Downloading your credit reports
• Finding the right lender and securing the best deal for you

Are they still available for residential properties?

Yes, although they are not as readily available as they once were, and the lending criteria for them are usually more stringent than those for residential mortgages.

Since the financial crisis 2008, lenders have been more reluctant to offer interest-only mortgages on residential purchases but have continued to offer them almost exclusively for buy-to-let investment purchases. In the past few years, however, interest-only mortgages have become more commonplace for residential purchases again, albeit with stricter criteria.

Often, there are large deposit and/or equity requirements and high minimum income thresholds for residential purchases. Some lenders will only consider this type of mortgage for high-net-worth individuals. However, if you can meet the criteria, it’s perfectly possible to use an interest-only mortgage to purchase residential property.

Second-home purchase

Some lenders allow interest-only mortgages for this purpose; however, you may need a specialist provider. Those lenders that do allow this type of residential purchase may have slightly different criteria, and therefore, a larger deposit may be required for second-home mortgages. 

In certain circumstances, such as buying a second home for a family member, getting a regulated buy-to-let mortgage with some lenders may also be possible. The interest-only specialists that we work with can point you in the direction of lenders willing to consider this type of purchase.

How does the cost compare to a repayment mortgage?

You can compare the monthly cost of a repayment mortgage versus an interest-only deal by using our calculator below. While the monthly cost of an interest-only mortgage will be lower, you will pay significantly more interest over the full term. This is because you are paying interest on the full principal amount for the duration of the mortgage. With a repayment mortgage, the capital balance reduces over time, meaning the total interest paid is lower.

How much you could borrow

The amount you can borrow will depend on a number of factors, most importantly, the purpose of the mortgage. In the case of investment properties, the borrowing is largely based on the property’s potential rental income. If you plan to buy a residential property, the total amount you can borrow will be determined by a multiple of your income. However, the loan-to-value (LTV) offered is likely lower than a residential repayment mortgage on the same income.

Our mortgage affordability calculator could help you to determine the size of loan that might be possible. Once you’ve tried it out, why not talk to one of the brokers we work with who specialises in this type of home loan?

Eligibility criteria

The criteria vary from lender to lender, although they are generally stricter in the case of residential purchases.

Lenders will typically expect you to meet the following requirements:

• Income and affordability: You’ll need to prove that you can afford the repayments and, in many cases, that you have an income in line with the lender’s minimum income threshold for this mortgage type.
• Credit history: Your credit rating will be less impactful on the outcome of your mortgage application than it would for a capital repayment mortgage, especially in the case of buy-to-let. However, serious credit issues could still be a stumbling block. Luckily, there are specific bad credit lenders and bad credit brokers who specialise in this area.
• Age: Most lenders have minimum and maximum age thresholds, although some interest-only mortgages, such as RIO (retirement interest-only), are intended specifically for older borrowers. Some lenders also have no maximum age requirement.
• Experience: If you’re looking to purchase for investment purposes, some lenders will prefer that you have prior landlord experience, particularly in the case of HMO (house of multiple occupancy) mortgages. Some lenders will consider first-time landlords; however, these will likely be more specialist providers.
• Deposit: The LTV (loan-to-value) amount offered on interest-only mortgages is typically lower than for repayment mortgages, making the deposit requirement greater. This will vary from lender to lender and depending on your circumstances. However, a 25% deposit is a typical requirement for a buy-to-let property, and for residential properties, it could be as high as 50%.
• Property type: No matter the mortgage type, lenders are often cautious about lending on non-standard construction properties. For example, if you’re looking to purchase a listed or timber-frame property, you’re likely to need a specialist lender.
• Repayment vehicle: This will likely have the most influence over a lender’s decision regarding interest-only mortgages. There are many potential options here, and a broker with expertise in this area will be best placed to help you choose the most suitable for your circumstances.

Acceptable repayment vehicles

Having a reliable repayment vehicle in place is the most important element of an interest-only mortgage application, and you may find that lenders are more flexible with some of the other eligibility criteria, providing they are comfortable that your chosen repayment method is solid.

There is not typically a requirement to have a set repayment vehicle for investment properties, as they are unregulated. However, it is very common for buy-to-let landlords to use the sale of the property or another property in their portfolio to repay the loan.

The type of repayment vehicles that each lender considers acceptable varies, and it’s perfectly possible to have one lender accept you when another has declined you based on your chosen vehicle. Some lenders will also accept multiple repayment vehicles against one purchase, although each option may then have a minimum acceptable value.

In each case, you’ll need to provide evidence of your chosen strategy, which may include any of the below options:

Sell the property

Selling the property is a popular repayment vehicle, especially for investment properties. You might choose to sell a residential property at the end of a longer mortgage term by downsizing to a smaller (or lower-value) dwelling and using the equity to repay the original loan. Bear in mind that some lenders have a minimum equity requirement for this to be acceptable.

Sale of other assets

You might also consider repaying the lump sum by selling an alternative (second) property from within your wider portfolio. Some lenders may accept alternative high-value assets like vehicle fleets, artwork, and jewellery.

Investments

There are a number of investment options that may be deemed acceptable repayment vehicles, including:

• ISA
• Stocks and/or shares
• Bonds
• Unit trusts
• Endowment policy

Endowment policies are no longer a popular repayment vehicle due to their notorious failure to grow in value in line with the cost of your loan. However, some lenders will still accept this type of investment if you can provide satisfactory proof of projected growth. As all investments are subject to fluctuation, lenders must be confident in their potential to repay your loan balance, and verified proof of policy will be required.

Cash repayment or pension lump sum

You could use personal savings, an inheritance, or the tax-free lump sum from your pension pot to repay the loan. Some lenders will also offer you the flexibility to make regular lump sum payments against the capital throughout the mortgage term.

Retirement interest-only mortgages (RIO)

A RIO has no fixed end date, and the loan will be repaid from the property sale when you either pass away or move into long-term care. So long as you’re still able to meet the affordability criteria for the monthly interest payments, it may be possible to remortgage onto this type of product. Always take qualified financial advice from an expert in later-life lending before committing to this decision.

Equity release

If you are 55 or older, an equity release product, such as a lifetime mortgage, maybe a suitable repayment vehicle. However, it’s important to seek relevant advice before releasing any form of equity.

Remortgage

There are a number of remortgage options you could consider. However, you’ll need to consider your age and the maximum term lenders will feel, especially if you are already approaching a 25-year term. Depending on your circumstances, your current lender may also be willing to extend your existing mortgage.

It’s possible to remortgage to a lender with more flexible age and term criteria or to a repayment mortgage. Some lenders, such as Skipton Building Society, also offer part and part mortgages, which combine a repayment and interest-only mortgage. This can make the repayment more manageable, as you will chip away at some of the capital, and the amount outstanding at the end of the term will be lower.

Which lenders offer these mortgages?

Despite many lenders having withdrawn their interest-only products from the market following the financial crisis in 2008, an increasing number of lenders are re-introducing this type of deal, and there are currently over 35 across the market offering them.

Most lenders have significantly stricter criteria for interest-only lending, with many having fairly high minimum income and equity/deposit requirements. Some lenders, however, such as HSBC and Barclays, are currently offering this type of product with no minimum equity requirement.*

Some examples of current lenders offering interest-only products and their relevant criteria are provided in the table below.*

Please note that lenders’ mortgage terms and criteria can be subject to change. The best way to keep track of the terms and conditions available at any given time is to speak to a mortgage broker.

What rates to expect

Interest-only mortgages are generally available at variable and fixed rates, similar to repayment mortgages.  Rates costs vary based on whether they are variable or fixed, the length of the fixed-term, deposit size, and the total amount and length of the loan.

See our rates table below for examples of the current deals available. Please note that these examples are for buy-to-let mortgages, as these are the most common type of interest-only mortgages.

Please note that the above rates were accurate at the time of writing but are always subject to change at the lender’s discretion. The best way to find the most up-to-date deals is to speak to a mortgage broker.

Get matched with an interest-only mortgage specialist

Whatever your reason for choosing an interest-only mortgage, the brokers we work with are experts in this field and can find the most suitable deal for your needs and circumstances. In addition to helping you secure the best rates, they can ensure the lender accepts your chosen repayment vehicle and help you prepare your application for a smooth transaction.

Our broker matching service will introduce you to the most suitable broker, so contact us on 0330 818 7026 or via this form, and we’ll get you started with a, no-obligation chat.