Key Facts
- Primary keyword: interest only mortgage - 9,900 monthly searches
- Independent editorial guide - no affiliate links, no commission
- Sources: FCA, gov.uk, HMRC, Money and Pensions Service
- Last reviewed June 2026
What Is an Interest Only Mortgage?
An interest only mortgage requires the borrower to pay only the interest on the outstanding balance each month. No capital is repaid during the term. At the end of the interest only mortgage term, the full original loan amount remains outstanding and must be repaid in a lump sum.
The monthly payment on an interest only mortgage is therefore significantly lower than on an equivalent repayment mortgage, because the payment covers interest only and not capital reduction. On a 200,000 pound interest only mortgage at 5 percent, the monthly payment is approximately 833 pounds, compared with around 1,169 pounds on a repayment mortgage over 25 years.
Interest only mortgages are available for both residential owner-occupier and buy-to-let purposes. The eligibility criteria, acceptable repayment vehicles, and lender availability differ significantly between the two.
Interest Only Mortgage Repayment Vehicles
Because the capital on an interest only mortgage is not repaid during the term, the borrower must have a credible plan for repaying the full balance at the end. This plan, known as the repayment vehicle, is assessed by the lender before the interest only mortgage is approved.
Acceptable repayment vehicles for residential interest only mortgages include ISA savings, pension lump sums, investment portfolios, endowment policies, and the sale of another property. The lender must be satisfied that the repayment vehicle is on track to produce sufficient funds at term end.
For buy-to-let interest only mortgages, the most common repayment vehicle is the sale of the investment property at the end of the term. Landlords use interest only mortgages to maximise monthly cash flow from rental income while planning to sell the property and repay the capital from the proceeds.
Who Qualifies for an Interest Only Mortgage?
Residential interest only mortgages are available from a limited number of lenders and typically require: a minimum income above 75,000 pounds per household; a loan-to-value ratio below 75 percent; a clearly evidenced repayment vehicle; and strong credit history.
The FCA's interest only mortgage guidance, introduced following the 2012 Mortgage Market Review, requires lenders to assess the credibility of the repayment vehicle, not merely its existence. A borrower who states they will save enough in an ISA must be able to demonstrate through documented financial planning that this is realistic.
Buy-to-let interest only mortgages have different eligibility criteria. Lenders assess rental income coverage - typically the rental income must be 125 to 145 percent of the monthly interest only mortgage payment - rather than the borrower's personal income.
Interest Only Mortgage Risks
The primary risk of an interest only mortgage is the repayment shortfall - arriving at the end of the term without sufficient funds to repay the capital. This was a widespread problem for borrowers who took out endowment-backed interest only mortgages in the 1980s and 1990s when endowment policies underperformed projections.
Borrowers on interest only mortgages face a longer exposure to property market risk. If property values fall significantly during the term, selling the property at term end may not generate enough to repay the interest only mortgage balance, leaving a shortfall the borrower must fund from other sources.
Lenders are required to contact interest only mortgage holders periodically to check whether the repayment vehicle remains on track. Borrowers who identify a projected shortfall early have more options: switching to a repayment mortgage, making regular overpayments, or increasing contributions to the repayment vehicle.
Switching from Interest Only to Repayment
Borrowers on an interest only mortgage can switch to a repayment basis at any time, subject to the lender's agreement and an affordability assessment. The new repayment mortgage will have higher monthly payments because the capital must now be repaid over the remaining term.
For a borrower 10 years into a 25-year interest only mortgage with 200,000 pounds outstanding, switching to repayment gives 15 years to repay the capital. The monthly payment increases substantially but the interest only mortgage risk of a terminal shortfall is eliminated.
Some lenders allow part-and-part arrangements, where a portion of the interest only mortgage converts to repayment while the remainder stays interest only. This reduces the terminal shortfall risk while keeping monthly payments lower than a full conversion.
Interest Only Mortgage for Buy-to-Let
The majority of buy-to-let mortgages in the UK are structured as interest only mortgages. Landlords prefer interest only mortgage products because lower monthly payments maximise net rental yield during the ownership period, with the capital repaid from eventual sale proceeds.
The buy-to-let interest only mortgage market includes products from specialist lenders including BM Solutions (part of Lloyds), Paragon, Fleet Mortgages, and The Mortgage Works (Nationwide). Rates for buy-to-let interest only mortgages are typically 0.5 to 1 percent above equivalent residential products.
Tax changes since 2017 have reduced the financial advantage of interest only mortgage structures for higher-rate taxpayer landlords, as mortgage interest relief on residential buy-to-let properties is now capped at the basic rate. Landlords should take current tax advice before selecting an interest only mortgage structure. Borrowers approaching the end of an interest only mortgage term who cannot repay the capital should contact their lender at least 12 months before term end. Options available include extending the interest only mortgage term, switching to a repayment basis with a reduced monthly payment, or converting to a retirement interest only mortgage if eligibility criteria are met.
Disclaimer: This guide is for informational purposes only and does not constitute financial advice. Products, eligibility criteria and regulations change frequently. Consult an FCA-authorised adviser before making any decision. Kael Tripton Ltd is not authorised or regulated by the Financial Conduct Authority.
Frequently Asked Questions
What is an interest only mortgage and how does it work?
An interest only mortgage requires payment of only the interest each month. No capital is repaid during the term. At the end of the interest only mortgage term, the full original loan amount must be repaid in a lump sum from a separately accumulated repayment vehicle.
Are interest only mortgages still available in the UK?
Yes, though the market is smaller than for repayment mortgages. Residential interest only mortgages are available from a limited number of lenders with strict eligibility criteria. Buy-to-let interest only mortgages are widely available.
What repayment vehicles do lenders accept for an interest only mortgage?
Acceptable repayment vehicles include ISA savings, pension lump sums, investment portfolios, endowment policies and proceeds from the sale of another property. The lender assesses whether the vehicle is credibly on track to repay the full balance.
Can I switch from an interest only mortgage to repayment?
Yes. Borrowers can switch from an interest only mortgage to a repayment basis at any time subject to the lender's affordability assessment. The monthly payment will increase as capital repayment is added. Part-and-part arrangements are also available from some lenders.
What happens if I cannot repay my interest only mortgage at the end of the term?
Borrowers who cannot repay at term end should contact the lender as early as possible. Options may include extending the interest only mortgage term, switching to repayment with a lower monthly payment than the original capital amount would suggest, or selling the property.
Sources
Last reviewed June 2026 · Kael Tripton Editorial
