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Interest only mortgages

If you want to buy a property but keep your monthly payments low, an interest only mortgage could be right for you. Compare mortgages with us to find a deal that could best suit your needs.

What is an interest only mortgage?

With an interest only mortgage, you only pay back the interest each month on the money you’ve borrowed. At the end of the mortgage term, you’ll still owe exactly what you borrowed so you’ll have to find a way to pay off this amount. Banks don’t want to put people in a position where they can’t pay back the money they owe, so interest-only mortgages aren’t as common as standard repayment mortgages.

What’s the difference between interest only and repayment mortgages?

With a repayment mortgage, you pay off the interest on the loan as well as the original amount you borrowed. This will make your monthly payments higher, but will also mean you should eventually pay off the loan in full. 
 
With an interest-only mortgage, you’ll only pay off the interest. That means you’ll pay less each month. But you’ll still have to pay off the full cost of the loan at the end of the mortgage term.

Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.

Are buy-to-let interest only mortgages available?

Interest only mortgages are more common in buy-to-let property purchases, where the property may be sold at the end of the mortgage to repay the original sum borrowed.

Can I get an interest only mortgage?

Interest only mortgages are available for home buyers, although they’re not as common as repayment mortgages. To get one, you’ll need a plan in place to repay what you owe when the mortgage ends. 

As with any other mortgage, whether you’re approved is at the lender’s discretion. But your application is more likely to be successful if:    

  • You have a large deposit or have equity in another property.   
  • You have a substantial annual income. If you’re a high earner, this could reassure the bank that you can pay off the final sum. 

Expert view from David Hollingworth, London & Country Mortgages 

“Interest only mortgages can offer borrowers some flexibility in their mortgage payments and give them an alternative way to repay. However, they’re not without risk and if the repayment plan doesn’t perform as hoped, it could leave a shortfall to deal with. 

Many lenders have returned to the interest only market now but there will often still be eligibility requirements to meet, so it makes sense to shop around to make sure you find a mortgage that will fit your individual circumstances.” 

Repayment plans

To qualify for an interest-only mortgage, you’ll need to prove to your lender that you have a solid repayment plan. Your lender will factor your payments into this plan in the affordability criteria they use.

You could build up enough money to repay the capital loan with:

You won’t be able to rely on a potential windfall, such as an inheritance or bonus payment.

Be warned. Your lender may regularly check that your repayment plan is still in place. This means that spending your savings once the mortgage is approved, for example, would probably be a bad idea.

How do I get an interest only mortgage? 

You can apply for an interest only mortgage directly with a lender or by using a mortgage broker. You can also compare mortgage deals within minutes with Comparethemarket.

Once you’ve found a deal, the application process is similar to a repayment mortgage. See more on how to apply for a mortgage

How much do I have to earn to get an interest only mortgage? 

The total amount you can borrow will typically be a multiple of how much you earn. But getting an interest-only mortgage can depend on lots of factors, not just earnings. These can include the price of the property, how much you want to borrow, your individual circumstances and the lender’s criteria.

How big a deposit will I need for an interest only mortgage?

This will vary depending on the lender. But to qualify for an interest-only mortgage, you’ll likely need a higher deposit than you would for a repayment mortgage, as banks consider them riskier. 

What are the advantages of an interest only mortgage?

  • Interest only mortgages typically have lower monthly payments than repayment mortgages.
  • You can use the savings you make on the monthly payments to improve your home and potentially increase its value.

What are the disadvantages of an interest only mortgage?

  • It can cost you more in the long run. With an interest-only mortgage, you pay interest on the entire amount for the whole term. Repayment mortgages allow you to chip away at the money owed, which means the amount of interest you pay should decrease over time.    
  • There’s no certainty. If the property is an investment, there’s no guarantee it will be worth enough to pay off the balance and settle the mortgage.

Always seek expert financial advice if you’re considering an interest-only mortgage. 

What happens at the end of an interest only mortgage?

Your lender will typically get in touch with you around a year before your mortgage ends to remind you of the upcoming deadline – then again with six months to go and just before the end.

You can ask your lender for a redemption notice or statement, which will tell you how much you need to pay to redeem (pay off) your mortgage in full.

If your repayment plan has stayed on track, you should already have enough money to pay off the outstanding mortgage at the end of its term.  

What happens if you can’t repay an interest only mortgage at the end of the term?

If you’re worried about not being able to pay off your interest only mortgage at the end of the term, contact your lender as soon as possible to discuss your options. These could include: 

  • Overpaying on your mortgage – while you should check for any early repayment charges, you could choose to overpay on your interest only mortgage. This is a good option if you come into some money, from an inheritance, for example. 
  • Switching to a repayment mortgage – switching to a repayment mortgage will allow you to chip away at your balance each month. However, your monthly repayments will rise significantly. 
  • Opting for a retirement interest only (RIO) mortgage – designed for older borrowers, there’s no end date to the loan with these mortgages. The capital only has to be paid back when you die, sell your home or go into care. A mortgage advisor could help you decide if this is a suitable option for you.
  • Extending your mortgage term – while this will only delay the problem, it may give you enough time to save the money to pay off the balance. But you may not be able to extend your mortgage term after a particular age or in certain circumstances. 
  • Remortgage – you could see if you could get a mortgage from a new provider, either a repayment mortgage or a new interest only mortgage that will give you time to save the money to pay off the capital.
  • Selling the property – if you have no other options, you may be forced to sell the property. As long as it hasn’t fallen into negative equity (when the property is worth less than the mortgage you owe), then selling will allow you to settle the mortgage. 

It’s a good idea to regularly check that your repayment plan is on track. If it looks like you might have a shortfall, consider getting advice from a financial advisor or mortgage specialist.

Can I get an interest only mortgage with bad credit?

It’s possible to get an interest only mortgage with  bad credit, but it’s not easy. And if you have outstanding debt to pay off, this could make it even more complicated. Plus, it’s likely that you’ll be charged a higher rate of interest than someone with a good credit score.

What is a part and part mortgage?

A part and part mortgage, or a hybrid mortgage, is a halfway house between an interest-only mortgage and a capital repayment mortgage. It can bring down your monthly repayments while making sure some of the balance is paid off, meaning you’ll have less to repay at the end.

Please note, we don’t compare this type of mortgage at Comparethemarket. 

Can you pay off an interest only mortgage early? 

Yes, but you could face early repayment charges. Check the terms of your mortgage to find out what your options are.

Alternatively, you could consider switching from an interest only mortgage to a repayment mortgage. This will allow you to begin paying off the capital you’ve borrowed over the course of your mortgage term. 

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The content written in this article is for information purposes only and should not be taken as financial advice. If you require support on the products discussed here, please speak to your bank/lender or seek the advice of an independent professional financial advisor. We also have more information on our Customer Support Hub.

Page last reviewed on 22 DECEMBER 2023
by Alex Hasty