How Interest Only Mortgages Work
With an interest only mortgage, your monthly payments cover only the interest charged on your loan - you're not paying off the capital (the original amount borrowed). This means significantly lower monthly payments compared to a repayment mortgage, but you'll still owe the full loan amount at the end of the term. For homeowners looking to remortgage, interest only can free up monthly cash flow, but you need a solid plan to repay the capital.
For example, on a £200,000 mortgage at 4% interest, monthly payments would be around £667 for interest only versus approximately £1,055 for a repayment mortgage over 25 years. That's nearly £400 per month difference - but remember, with interest only you'd still owe £200,000 at the end.
Repayment Vehicles Explained
To get an interest only mortgage, lenders require a credible 'repayment vehicle' - a plan for how you'll pay off the capital at the end of the term. Acceptable repayment vehicles vary between lenders but typically include sale of the mortgaged property (if you have sufficient equity), sale of another property, investments or savings, pension lump sums, or endowment policies.
Lenders have become stricter about repayment vehicles since the 2014 Mortgage Market Review. Simply hoping house prices will rise isn't considered a valid plan. You'll need to demonstrate how your chosen method will realistically cover the loan amount, which usually requires providing evidence of existing savings, investments, or property equity.
Which Lenders Offer Interest Only?
Residential interest only mortgages have become harder to find, but they're not impossible. Many lenders restrict interest only to higher-value properties or require maximum 50-75% LTV. Some building societies and specialist lenders are more flexible than high street banks. For buy to let properties, interest only remains the standard approach.
Common requirements include minimum property values of £250,000-£500,000, maximum LTV of 50-75%, and minimum loan sizes. Each lender has different criteria, which is why broker advice is valuable - we know which lenders accept which repayment vehicles and can match you with suitable options.
Risks and Considerations
The main risk with interest only is ending your mortgage term still owing the full loan amount without a way to repay it. This has affected thousands of borrowers who took out interest only mortgages decades ago without adequate planning. It's crucial to regularly review your repayment vehicle and ensure it remains on track.
Consider whether part-and-part might be a better option - where part of your mortgage is interest only and part repayment. This gives you some flexibility while still paying down some capital each month. Our advisors can help you understand the pros and cons of different structures.