What is an interest-only mortgage?

How does an interest-only mortgage work?  

With interest-only mortgages, you only repay the interest on the amount that you’ve borrowed, rather than repaying the amount itself. This means that, at the end of the mortgage term, you still owe the full amount that you’ve borrowed.

This differs from repayment mortgages where the monthly repayments go towards paying off both the interest and the borrowed amount. At the end of a repayment mortgage term there is nothing left to pay as you chip away at the balance as you go along.

Are buy-to-let interest-only mortgages available?  

Yes, there are buy-to-let interest-only mortgages available. In fact, buy-to-let mortgages tend to be on an interest-only because landlords prefer lower monthly costs. They can then save the difference between the mortgage repayments and the rent their receiving from tenants. This money can be then used towards clearing the remaining balance at the end of the mortgage term.

It’s important to plan ahead because the full amount borrowed will be payable at the end of the mortgage term - regardless of whether you buy a property to let or live in.

What happens at the end of an interest-only mortgage?  

Once you’ve reached the end of your interest-only mortgage term, you’ll have to repay the full amount you’ve borrowed. This is because the monthly payments have only been going towards repaying the interest on the balance - not the balance itself.

At the very beginning of the interest-only mortgage, you’ll have to prove to the lender how you plan to repay the mortgage at the end of the term. It isn’t sufficient to say that you’ll sell the property and repay the mortgage with the money from the sale. You can’t guarantee that the property will be worth the same or more when it comes to it.

So, at the beginning of the interest-only mortgage, you should choose a repayment tool like a savings account or ISA, shares or investment bonds, or other properties or assets. It’s your responsibility throughout the duration of the mortgage term to ensure that you’re following a consistent repayment plan that will enable you to pay off the full balance, so it may be worth speaking to a mortgage adviser about your options.

What happens if I can’t pay off my interest-only mortgage?  

If you can’t repay your interest-only mortgage at the end of the mortgage term, don’t worry, there are a few options:

• you can ask your lender if they’ll extend the term of your loan, which will give you more time to save up if they agree
• you could try to find a good deal on a repayment mortgage and switch (just check if there will be any early repayment charges involved for doing so)
• if the value of your property has gone up, you could sell it to cover the remaining balance
• you could consider selling assets (such as another property if you have one) to raise the funds

Interest-only vs repayment mortgage  

If you’re not sure whether an interest-only or repayment mortgage is right for you, here’s a quick list of the pros and cons to help you decide.

Interest-only mortgage   

Pros	Cons
Lower monthly repayments as you’re only repaying the interest each month – not the capital	Can be more complicated as you need to factor in savings on top of your monthly repayments. You can’t rely on selling the house to cover the balance, as the house price could drop
Increased flexibility, as you decide which savings tools to use	You’ll likely need a higher deposit to offset the risk to the lender, compared to a repayment mortgage
Potential to invest any money that has been freed up by lower monthly mortgage repayments	May be more expensive in the long run because the borrowed amount is fixed and interest will always be calculated on the full balance

Repayment mortgage 

Pros	Cons
Pay less interest in total, as it reduces in line with the balance	Can be less convenient if you're looking to buy-to-let, as your overheads will be higher. Most buy-to-let mortgages are interest-only
Repayment mortgages are more common so you may have more options available	Your monthly repayments will be higher, as you pay both capital and interest at the same time
You own your property at the end of the term without additional payments needed	No flexibility of monthly payments if you get a fixed repayment mortgage

Can I get an interest-only mortgage?  

Interest-only mortgages are deemed riskier for lenders than repayment mortgages, so the number of lenders willing to offer them is much lower. In turn, the eligibility criteria is generally tighter.

Interest-only mortgages will often require larger deposits and a higher annual income, compared to repayment mortgages.

You may also find it easier to get an interest-only mortgage if you have a good credit score, as it shows lenders that you are less of a risk to lend to.

How to qualify for an interest-only mortgage  

You may be eligible for an interest-only mortgage if you:

• can prove your annual earnings are enough to cover the amount you want to borrow
• can provide proof that you have the required deposit amount
• have a detailed plan for how you intend to repay the borrowed amount at the end of the term

Can a first-time buyer get an interest-only mortgage?  

As an interest-only mortgage tends to require a higher deposit and a higher annual income, it’s less likely to be a suitable option for a first-time buyer. That isn’t to say that it’s impossible though. As long as you meet the specific lender’s criteria, simply being a first-time buyer shouldn’t impact your eligibility in itself. 

What deposit is required for an interest-only mortgage?

The deposit required for an interest-only mortgage depends on the lender, but generally they require higher deposits than repayment mortgages, which generally start at least 10%-15%. Many interest-only mortgage lenders will need a deposit of at least 25%, with some requiring as much as 50%.

Can I extend my interest-only mortgage term?  

Whether you can extend your interest-only mortgage term depends on the lender. If you’re concerned you won’t be able to repay the full amount borrowed by the end of your interest-only mortgage term, you should contact your lender as soon as possible about extending your term.

Can I change my interest-only mortgage to a repayment mortgage? 

Yes, in theory you should be able to change your interest-only mortgage to a repayment mortgage – as long as you meet the lender’s criteria. You may even be able to do it through your existing lender, however it’s always worth shopping around to find the best deal for you.

Remember, your monthly repayments are likely to increase if you switch from an interest-only to a repayment mortgage. Missing or not being able to make a full repayment will have a negative impact on your credit score. So make sure you can afford to switch to a repayment loan before going ahead.

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Mortgages are secured against your property. This means your home may be at risk if you fall behind with your mortgage repayments.

Note, the more you borrow and the longer your mortgage term, the more interest you'll pay in total.

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