Last reviewed: June 2026
TL;DR- Monthly payments cover interest only - the original loan amount is repaid at the end of the term via a separate repayment vehicle.
- Lenders require evidence of a credible repayment strategy: ISA, pension, investments, property sale or endowment.
- FCA rules tightened eligibility significantly after the 2014 Mortgage Market Review - most lenders now require loan-to-value below 75%.
- Switching to repayment at any point is possible but monthly costs rise immediately.
What Is an Interest Only Mortgage?
With an interest only mortgage, monthly payments cover the interest charged on the loan but make no reduction to the outstanding capital balance. At the end of the mortgage term - typically 25 years - the full original loan amount remains due and must be repaid in a single sum.
This structure produces significantly lower monthly payments than a repayment mortgage on the same loan amount. The difference between interest only and repayment payments is not a saving - it is a deferred obligation that accumulates throughout the term.
The FCA publishes data on the interest only mortgage stock held by UK lenders and has consistently flagged the risk of borrowers reaching the end of their term without an adequate repayment strategy in place.
How Lenders Assess Eligibility
Since the Mortgage Market Review of 2014, FCA rules require lenders to assess affordability on a repayment basis even when the product itself is interest only. This means the borrower must demonstrate they could service a repayment mortgage at the same loan amount before a lender will offer an interest only product.
In practice, most high street lenders apply additional overlays:
- Maximum loan-to-value of 75%, meaning a minimum 25% deposit or equity stake.
- Minimum income thresholds, commonly £75,000 individually or £100,000 jointly, though these vary by lender.
- Maximum loan size caps, often £500,000 to £1,000,000 on interest only terms.
- Mandatory evidence of a repayment vehicle at application stage.
Private banks and specialist lenders serving high-net-worth borrowers operate under different internal criteria and may apply more flexible overlays, though FCA conduct rules apply equally.
Repayment Vehicles: What Lenders Accept
A repayment vehicle is the mechanism by which the borrower intends to repay the capital at the end of the term. Lenders assess the credibility of the vehicle at application and, increasingly, conduct periodic reviews during the mortgage term.
Commonly accepted repayment vehicles include:
- Stocks and shares ISA or investment portfolio - lenders typically discount the projected value by 25-40% to allow for market falls.
- Pension lump sum - subject to HMRC rules on tax-free cash, currently capped at 25% of pension value up to the lump sum allowance.
- Endowment policy - largely a legacy vehicle from pre-2000 mortgages; new endowments are rarely used.
- Sale of another property - acceptable to some lenders where the borrower owns a second property with sufficient equity.
- Sale of the mortgaged property itself - accepted by a minority of lenders, most commonly for older borrowers using a downsizing strategy.
The FCA's guidance on interest only mortgages, set out in MCOB 11, requires lenders to take reasonable steps to verify the repayment strategy is credible and that the borrower understands the risk of shortfall.
The Interest Only Maturity Risk
The FCA and UK Finance have tracked what is known as the interest only maturity wall - a cohort of mortgages taken out in the 1990s and 2000s that are reaching their end dates with borrowers who have inadequate repayment strategies. UK Finance data has shown hundreds of thousands of interest only mortgages maturing each year through the mid-2020s.
Borrowers in this position have several options: switch to a repayment mortgage (if affordable), extend the term, remortgage to a new interest only product (if equity and income qualify), or sell the property. Lenders are required under FCA rules to contact borrowers ahead of maturity and explore options before repossession is considered.
The Financial Ombudsman Service (FOS) has upheld complaints from borrowers who were sold interest only mortgages without adequate explanation of the repayment vehicle requirement, particularly endowment mortgages sold before 2000.
Part-and-Part Mortgages
A part-and-part mortgage splits the loan into two portions: one on an interest only basis and one on a repayment basis. This reduces monthly payments compared with a full repayment mortgage while ensuring at least some capital is being repaid each month. The interest only portion still requires a repayment vehicle for the outstanding balance at term end. Not all lenders offer this structure.
Interest Only for Buy-to-Let
Interest only is the dominant structure in the buy-to-let market. Landlords typically use rental income to service the interest and rely on property value appreciation or eventual sale of the asset to repay the capital. Buy-to-let mortgage affordability is assessed primarily on rental income coverage rather than personal income, though most lenders require rental income to cover 125-145% of the mortgage payment at a stressed interest rate. Tax rules for landlords - specifically the restriction of mortgage interest relief to basic rate tax credit under Section 24 of the Finance Act 2015 - apply equally to interest only buy-to-let mortgages.
Frequently Asked Questions
Can I switch from interest only to repayment during the mortgage term?
Yes. Most lenders allow borrowers to switch to a repayment basis at any point, subject to an affordability assessment. Monthly payments will increase immediately to reflect both interest and capital repayment. Some lenders allow partial switches where only part of the loan converts to repayment.
What happens if my repayment vehicle falls short at the end of the term?
If the repayment vehicle does not cover the outstanding loan, the borrower must make up the shortfall from other sources. If they cannot, the lender has the right to pursue repossession. The FCA requires lenders to contact borrowers well in advance of maturity to explore options before this point is reached.
Are interest only mortgages still available in 2026?
Yes, but eligibility criteria are significantly stricter than before the 2014 Mortgage Market Review. Most mainstream lenders require minimum equity of 25%, a credible repayment vehicle, and income above their internal threshold. Specialist and private bank lenders serve the higher-value end of the market.
Does the FCA regulate interest only mortgages differently to repayment mortgages?
The same FCA conduct rules apply under MCOB, but specific provisions in MCOB 11 address the repayment vehicle requirement and the obligation to assess affordability on a repayment basis. Lenders must also have processes in place to monitor and contact borrowers with maturing interest only loans.
