Interest-only mortgage explained
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Quick answer: Interest-only mortgages mean monthly payments cover interest only — the capital must be repaid at the end via savings, investments or selling the property.
Most residential interest-only lending now requires credible repayment strategies. Buy-to-let often remains interest-only. FCA rules tightened after the financial crisis. This guide explains risks and repayment plans.
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Read the full mortgages & first homes guide →Primary source: www.gov.uk/mortgage-calculator
Repayment strategies
Lenders accept ISAs, pensions, sale of property or other assets as planned repayment — they may review periodically. You must evidence a credible strategy, not just hope house prices rise.
Relying on house price growth alone is rarely accepted without other assets — property values can fall. Lenders want a diversified repayment plan covering the full loan at maturity.
Switching to repayment
Many borrowers remortgage to capital repayment before term ends to chip away at debt gradually. Switching before the interest-only period ends avoids a repayment cliff edge.
Part-and-part deals split the loan between repayment and interest-only portions. This reduces monthly payments while still paying down some capital each month.
Buy-to-let context
Landlords often use interest-only to maximise cash flow, repaying via sale or refinancing. Mortgage interest no longer fully deductible against rental income — use allowable expenses rules.
Stress tests apply at higher rates when applying for new BTL loans. Lenders typically test affordability at a rate several percentage points above the product rate.
Common questions
Can I get interest-only as a first-time buyer?
Very difficult — most residential first-time buyer products require capital repayment.
What if my endowment underperforms?
Historical endowment shortfalls show why monitoring repayment vehicles matters — top up savings if projections fall short.
Are retirement interest-only mortgages different?
RIO mortgages suit older borrowers — interest-only with repayment typically from property sale after death or move to care.