Interest-only mortgages

Compare interest-only mortgages and see how your monthly payments would change depending on the initial period, total mortgage length, your deposit and how much you want to borrow.

After you choose an interest-only mortgage deal, one of our expert mortgage brokers can check whether you're eligible and help arrange the mortgage for you.

Your home may be repossessed if you do not keep up repayments on your mortgage.

An interest-only mortgage works by only including the interest you’ve accrued in your monthly repayments. You don’t pay back any of the capital you’ve borrowed, which means your payments will be less than on a repayment mortgage.

However, you will still owe the full mortgage amount at the end of your mortgage term. This will usually need to be repaid as a lump sum, so you must understand how you’ll cover this final payment before applying.

If you have a repayment mortgage, you pay off the interest and a small part of the loan balance every month. This means your monthly payments will be higher because you’re clearing some of your mortgage with each repayment. 

At the end of your repayment mortgage term, you will have cleared your loan and have nothing left to pay if you have kept up with your payments. 

For example, if you borrow £240,000 on a repayment basis at a 4% interest rate, your monthly payment would be £1,266 over a 25-year term. However, once the mortgage ended, you would have nothing else to pay.

The same mortgage on an interest-only basis would result in a much lower monthly payment of £800. At the end of the 25-year term, you would then need to repay the initial £240,000 back to your lender, usually as one lump sum. 

In this example, you would pay a total of £379,883 over the full term with a repayment mortgage. With interest-only, you would pay a total of £479,760 - nearly £100,000 more over the 25-year term.

An interest-only mortgage can be a good option if you need to keep your monthly payments down, but there are several important things to consider first. One of the most important is understanding how you will repay the balance at the end of your mortgage. 

If you don’t have a repayment plan in place, an interest-only mortgage is a risky option. Here are the pros and cons of interest-only mortgages to help you work out if they’re right for you:

Pros of interest-only mortgages

• Lower monthly payments: You will pay much less each month compared to the same mortgage deal on a repayment basis.

• Borrow more: You could potentially buy a more expensive home by borrowing more than you’d be able to on a repayment mortgage.

• Flexibility: You could be able to make overpayments when you can afford to or switch to a repayment plan if your situation changes.

• Buy-to-let option: Interest only is popular with landlords as it keeps costs down, and the property can be sold at the end of the mortgage to repay the loan.

Cons of interest-only mortgages

• More expensive overall: With an interest-only mortgage, the balance of your mortgage doesn’t go down, so you always have to pay interest on the full balance. This means it usually costs more overall than a repayment loan.

• Paying off the capital: At the end of the term, you need something in place to repay the loan. If you can’t, you run the risk of having your home repossessed.

• Large deposit: Lenders consider interest-only mortgages high-risk, so many ask for a deposit of at least 25% and expect you to be a high earner.

• Risk of a shortfall: If something happens to your repayment plan and it doesn’t cover your loan, you’ll need to find a way to make up the shortfall. 

Once your mortgage term ends, your lender will ask you to repay the amount you borrowed back in full. To do this, you will need to have a repayment plan in place. 

Most lenders will ask you what this is when you apply for an interest-only mortgage deal. They may choose not to lend to you if you can’t provide evidence of your repayment plan. 

There are several different ways you can pay off your interest-only mortgage, including:

• Savings and investments: If you have managed to save and invest enough, you can use this to pay off your mortgage balance. However, relying on investments can be risky as their value can go down as well as up.

• Pension lump sum: You could receive a lump sum from your pension when you retire to cover your mortgage. Again, be careful not to rely on this, as you could receive less than projected if your pension goes down.

• Switch to repayment: If you can afford to, you could switch to a repayment mortgage and start paying off the balance. Don’t forget your monthly payments will be higher, but you could extend your mortgage term to reduce your repayments. 

• Remortgage: You could switch to a new deal and continue making monthly payments. Be aware that eligibility criteria will still apply, and your age at the end of your mortgage might limit your options. 

• Sell your property: You could agree to sell your property once your term ends, provided the value covers the amount you owe. If it has increased in value, you can use the equity to buy a new home.