The Complete Guide to Interest Only Mortgages

Interest only mortgages were once one of the most popular ways to buy a home in the UK. While their availability for residential borrowers has reduced significantly since the financial crisis, they remain an important part of the mortgage landscape — particularly for higher-income borrowers and buy-to-let investors. In this guide, we explain how interest only mortgages work, who they are suitable for, what repayment vehicles lenders accept, and the current state of interest only lending in the UK market.

What is an Interest Only Mortgage?

With an interest only mortgage, your monthly payments cover only the interest charged on the loan. You do not repay any of the capital (the original amount borrowed) during the mortgage term. At the end of the term, you must repay the full loan amount in one lump sum.

For example, if you borrow £300,000 on an interest only basis over 25 years, your monthly payments will only cover the interest. At the end of the 25 years, you will still owe the full £300,000, which must be repaid in full. This is fundamentally different from a repayment mortgage, where your monthly payments gradually reduce the balance until it reaches zero at the end of the term.

Because you are not paying down any capital, monthly payments on an interest only mortgage are significantly lower than on a repayment mortgage for the same loan amount. However, you need a credible plan — known as a repayment vehicle — to accumulate the funds necessary to repay the capital at the end of the term.

How Does an Interest Only Mortgage Work?

You pay only the monthly interest on your loan, and the full capital balance remains unchanged throughout the entire term. Each month, your lender calculates the interest owed on the outstanding loan balance, and that is all you pay. At the end, you repay the capital in one lump sum using a separate repayment vehicle.

1. 01

   You borrow the capital

   The lender advances the full mortgage amount, secured against your property. For example, £300,000 to purchase a home worth £600,000.

2. 02

   Monthly interest payments

   Each month you pay only the interest on the loan. At 4.5% on £300,000, that would be approximately £1,125 per month — compared to around £1,668 on a repayment basis.

3. 03

   Build your repayment vehicle

   Throughout the mortgage term, you separately save or invest enough to repay the capital. This could be through ISAs, investments, pension lump sums, or other approved vehicles.

4. 04

   Repay the capital at term end

   When the mortgage term expires, you must repay the full original loan amount in one lump sum. If your repayment vehicle has performed as planned, you use those funds. If not, you may need to sell the property, remortgage, or find alternative funding.

The lower monthly payments are the primary attraction of interest only mortgages. They free up cash flow that can be directed towards investments, business ventures, or other financial priorities. However, this comes with the responsibility of ensuring you can repay the full capital when the term ends.

Who Qualifies for a Residential Interest Only Mortgage?

You typically need a minimum household income of £75,000, at least 50% equity in the property, and a credible plan to repay the capital at the end of the term. Since the Mortgage Market Review of 2014, lenders have tightened their criteria considerably. The typical requirements include:

• Minimum income: Most lenders require a minimum household income of £75,000 per year, with some requiring £100,000 or more. This ensures borrowers have the financial capacity to save or invest alongside their mortgage payments.
• Maximum loan-to-value (LTV): Residential interest only mortgages are typically available up to 50% LTV, meaning you need at least 50% equity in the property. Some lenders may stretch to 60% or 75% LTV for higher earners.
• Credible repayment vehicle: You must demonstrate a clear and realistic plan to repay the capital at the end of the term. The lender will assess the viability of your chosen repayment strategy.
• Clean credit history: A good credit record is generally expected, though requirements vary between lenders.
• Minimum loan amount: Some lenders set a minimum mortgage amount for interest only, often around £150,000 to £250,000.

It is worth noting that buy-to-let interest only mortgages operate under entirely different criteria. Rental income is the primary consideration, and there is no minimum personal income requirement in most cases. Read our guide to interest only buy-to-let mortgages for more detail.

What is a repayment vehicle and which ones do lenders accept?

A repayment vehicle is the strategy you will use to accumulate the funds needed to repay the mortgage capital at the end of the term, such as ISAs, investment portfolios, pension lump sums, or property sales. Lenders will want to see evidence that your chosen vehicle is credible and realistic. The most commonly accepted options include:

Can you use a stocks and shares ISA as a repayment vehicle?

Yes, and it is one of the most popular options. Regular contributions to a stocks and shares ISA can build a substantial tax-free fund over the mortgage term. With the current annual ISA allowance of £20,000 per person, a couple could invest up to £40,000 per year tax-free. Over 25 years, even modest returns can generate significant growth. However, investment values can go down as well as up, and there is no guarantee the fund will be sufficient to repay the mortgage.

Can other investments be used as a repayment vehicle?

Yes, general investment accounts, unit trusts, and other investment portfolios may also be accepted as repayment vehicles. Lenders will typically want to see a diversified portfolio managed by a reputable provider, with regular contributions that are projected to grow sufficiently over the term. Capital gains tax may apply to gains outside of an ISA wrapper.

Can you use your pension to repay an interest only mortgage?

Yes, under current pension freedoms you can typically take 25% of your pension pot as a tax-free lump sum from age 55 (rising to 57 from 2028). If you have a substantial pension, this could form part or all of your repayment vehicle. Lenders will assess the projected value of your pension at the point when the mortgage matures.

Can you sell another property to repay the mortgage?

Yes, if you own another property that you plan to sell, the proceeds could be used to repay the mortgage capital. This is more commonly accepted for older borrowers who may downsize in the future or for those with a buy-to-let portfolio.

What happened to endowment mortgages?

Endowment mortgages were extremely popular in the 1980s and 1990s. Borrowers paid into an endowment policy alongside their interest only mortgage, with the expectation that the policy would mature with enough to repay the capital. Many endowments fell short of their projected values, leaving borrowers with a shortfall. While endowments are no longer sold for this purpose, some borrowers still have existing policies.

Can regular savings be used as a repayment vehicle?

Some lenders may accept regular savings, particularly for smaller loan amounts, though it is less common. With savings interest rates typically lower than mortgage rates, this approach may be less efficient than investment-based alternatives. Lenders will want to see a realistic savings plan that accounts for inflation.

Are interest only mortgage rates higher than repayment rates?

No, interest only mortgage rates are generally very similar to repayment mortgage rates. The rate is determined by the lender's pricing, your LTV, and the product type (fixed, tracker, or variable) rather than whether the mortgage is interest only or repayment. Because residential interest only mortgages are typically restricted to lower LTVs (50% or below), borrowers often qualify for the lender's best rate tiers.

For a detailed look at current rates and how to secure the best deal, read our guide to interest only mortgage rates.

What is the difference between interest only and repayment mortgages?

The core difference is that with interest only you pay just the interest each month and owe the full capital at the end, whereas with repayment you gradually pay off both interest and capital until the balance reaches zero. The right choice depends on your financial circumstances, investment strategy, and attitude to risk:

For a more detailed analysis with worked examples, read our guide to interest only vs repayment mortgages.

What is a part and part mortgage?

A part and part mortgage (also called a split mortgage) combines interest only and repayment elements within a single mortgage. For example, you might have £200,000 on a repayment basis and £100,000 on interest only. This gives you lower monthly payments than a fully repayment mortgage while still ensuring that a significant portion of the capital is being paid down over the term.

Part and part arrangements can be a useful stepping stone if you cannot qualify for a fully interest only mortgage, or if you want to reduce your repayment vehicle obligation. They are also commonly used when switching from a fully interest only mortgage to a repayment basis where affordability does not stretch to full repayment.

Can you still get an interest only mortgage in the UK?

Yes, but availability for residential borrowers is much more restricted than it used to be. Interest only mortgages were enormously popular before the 2008 financial crisis, when lending criteria were much less stringent and many were taken out with little or no repayment strategy in place.

The Mortgage Market Review of 2014 fundamentally changed the landscape. The FCA required all lenders to assess affordability more rigorously and to ensure borrowers had credible repayment vehicles. Many lenders withdrew from the residential interest only market entirely, and those that remained imposed strict criteria.

Today, an estimated 1.5 million interest only mortgages remain outstanding in the UK. The FCA has expressed concern about borrowers approaching the end of their mortgage terms without adequate repayment plans. If your interest only mortgage is approaching maturity, read our guide to what happens when your interest only mortgage ends.

For buy-to-let, the picture is very different. Interest only remains the standard mortgage type for landlords, as rental income covers the monthly interest payments while the property (ideally) appreciates in value over time.

What are the pros and cons of interest only mortgages?

How do you get an interest only mortgage?

Start by confirming you meet the income and LTV requirements, then choose a credible repayment vehicle and speak to a specialist broker who can identify suitable lenders. Here is a step-by-step breakdown:

• Assess your eligibility: Check whether you meet the typical minimum income (£75,000+) and maximum LTV (50%) requirements. Some lenders have different thresholds, so it is worth exploring the market.
• Choose your repayment vehicle: Decide how you plan to repay the capital and ensure it is credible and evidenced. If you already have investments or pension savings, gather recent statements.
• Consider part and part: If you do not quite meet the criteria for full interest only, a part and part arrangement may be an option.
• Speak to a broker: An experienced mortgage broker can navigate the restricted interest only market, identify which lenders match your profile, and present your application in the best possible light.
• Compare rates carefully: While rates may be similar to repayment products, the overall cost of the mortgage is very different when you factor in the capital that remains outstanding.

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