Interest only mortgages

An interest-only mortgage is a loan where you only repay the interest on the amount you’ve borrowed each month. This means the monthly payments on your home are typically lower than for a repayment mortgage.

At the end of your mortgage term, you’ll still owe the same sum you originally took out. This is usually then repaid in one lump sum.

Interest-only mortgages aren’t as common as standard repayment mortgages. And getting accepted for one isn’t easy because the eligibility criteria are more strict.

When you only repay interest on your mortgage, you’ll have to fully pay off your original loan when your mortgage comes to an end.

To do this, you’ll need what’s known as a repayment vehicle or plan. It could be an investment plan, shares portfolio, an ISA, savings or property sale.

You’ll have to show that you have a repayment plan in place before a lender will agree to give you an interest-only mortgage.

Interest-only mortgages are available, although they’re not as widespread as repayment mortgages.

As with any mortgage, approval will depend on passing affordability and eligibility checks. But your application for an interest-only mortgage is more likely to be successful if:

• You have a large deposit – at least 20-25% of the property’s value. Some lenders ask for a minimum of 50%

• You have a substantial annual income – typical minimum income requirements are £75,000 for solo applicants and £100,000 for joint applicants.

You also need proof that you have a repayment plan in place to be able to pay what you owe when the mortgage ends.

It’s possible to switch from a repayment deal to an interest-only mortgage for the long term.

However, you’ll need to meet the lender’s eligibility criteria for an interest-only mortgage and have a repayment plan in place to pay off the mortgage at the end of the term.

Separately, if you’re struggling to meet your monthly repayments on a repayment mortgage, the government’s Mortgage Charter lets you switch to interest-only payments for six months.

There’s no affordability check and the switch won’t have any negative impact on your credit score. You will pay back more in the long run, as you won't be chipping away at the principal mortgage balance while on an interest-only agreement.

Yes, but you could face early repayment charges. Check the terms of your mortgage for more information on the size of any charge.

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.

You can compare interest-only mortgages with Compare the Market.

If you’d prefer to discuss the possibility of an interest-only mortgage, we’ve partnered with L&C Mortgages² to provide you with fee-free mortgage advice. You can get in touch with one of their advisors here.