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When you take out an interest-only mortgage, you only pay back the interest on the loan and not the loan itself until the very end of the mortgage term. This makes your monthly repayments smaller than traditional repayment mortgage monthly payments, but you will eventually have to repay the full loan amount at the end of the term. Find out more about interest-only mortgages in our guide below and use our comparison tool to discover the best interest-only mortgage rates.

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What is an interest only mortgage

If you choose an interest only mortgage, you just pay back the interest on the money you borrowed. This means your monthly payments are much smaller than with a repayment mortgage. But you end up paying more interest over the full mortgage term.

In contrast, a repayment mortgage is a mortgage where the monthly payments go towards both the interest on the loan, and the loan capital amount. Your monthly payments are higher than interest-only payments, however, by the end of the mortgage term you will have paid off both the loan and the interest owed.

On an interest only mortgage of £200,000 over 25 years with an interest rate of 2.5%, your monthly repayments would be just £417. With a standard repayment mortgage with the same term and rate, your monthly repayments would be £897.

What happens at the end of an interest only mortgage term?

When your interest only mortgage term ends, you must repay the full amount you borrowed at the start. For this reason, you’ll need to be able to prove to mortgage lenders that you will be able to repay the full borrowed amount before they approve the mortgage. Lenders will look for evidence that you could pay off the mortgage with savings, other investments, or by selling the property itself.

How to get an interest-only mortgage

Repayment mortgages are more common and easier to get than interest only mortgages. The criteria to get an interest only mortgage are far tougher than a repayment mortgage and include a large deposit, as well as a clear repayment schedule for how you’ll repay the full loan at the end of the term. However, the exception is buy-to-let property. Nowadays, it’s common for interest-only mortgages to primarily be approved for landlords looking for buy-to-let property. Lenders often are more confident lending for buy-to-let property as the property could be sold at the end of the term to repay the loan if required.

How do interest only mortgages compare to repayment mortgages?

Over 25 years, the total cost of that £200,000 interest only mortgage with an interest rate of 2.5% is therefore £325,000.

The total cost of the same mortgage on a repayment basis is just £269,000.

This is because you're reducing the principal debt with each payment. So by the end, most of your money goes towards paying off the capital rather than the interest.

The key to making an interest only mortgage work for you is therefore to earn a higher rate of return on the money you save on your mortgage repayments.

If, for example, you are buying a property to rent it out, your sums may show you can make more money in rent than you will pay in extra interest by taking out an interest only mortgage.

If you can then sell the property at a profit, it’s a win-win, which is why many buy to let mortgages- where you buy a property specifically to rent it out - are interest only mortgages that are settled in this way.

If your aim is to avoid having to sell the property, you will have to use a different repayment vehicle. This might be savings, a pension withdrawal, or another investment fund. Really, any legitimate lump sum that can clear the full debt amount.

Either way, the lender will want to know about your planned repayment method before offering you an interest only mortgage.

How to pay off an interest only mortgage early

Similarly to repayment mortgages, if you want to pay off your interest only mortgage early, you may incur additional early repayment fees depending on the terms of your mortgage. Be sure to check the details of your mortgage to avoid incurring extra costs, or speak to your mortgage lender.

Retirement interest only mortgages

Some lenders offer interest only mortgages specifically for people in retirement. These specialist deals work in almost exactly the same way as other interest only mortgages.

The differences are:

  • The loan is paid off when you die, sell the house or go into care
  • You do not have to prove that you can repay the capital, though you must show you can meet the monthly repayments.

Retirement Interest only mortgages are popular with older borrowers whose regular income is lower than when they were employed, making lower monthly repayments a useful advantage.

How much you can borrow, and the rates you're eligible for will depend on your retirement income. Problems may arise for your descendants though. The property (which may be the sum-total of their inheritance) will most likely need to be sold to pay off the debt.

Interest only mortgage FAQs

Can I switch my interest only mortgage rate?

Depending on your circumstances, you can remortgage your interest only mortgage to another interest only deal or switch to a repayment mortgage if you wish to start repaying the capital amount that you owe the lender. Switching to a repayment mortgage will increase your monthly payments, however, at the end of the mortgage term you will not owe any capital.

How do I find the best interest only mortgage lenders?

You can use our mortgage repayment calculator to find the best interest only mortgage deals to suit your requirements. Choose the repayment type as 'interest only' to see how much you could repay each month, but remember that it’s very difficult to get an interest only mortgage as a first time buyer.

Is overpaying an interest only mortgage allowed?

Technically, overpaying an interest only mortgage is possible, either for free or for a fee. But before you do, talk to your lender to discuss your options. If you can afford to overpay, consider switching to a repayment mortgage so you can gradually reduce the capital instead.

Can I get a part and part mortgage?

Yes, you can get a mortgage that is part repayment and part interest only. With a mortgage of this kind, you will pay off some of the loan principal each month, but there will still be an amount that must be settled at the end of the mortgage.

How can I find the best interest only mortgage rates?

If you’re considering an interest only mortgage, use our calculator to carry out a comparison and find out how much you will pay each month to make sure that you can afford the repayments. You can find the cheapest interest only mortgages available on the market with a comparison table.

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Last updated: 11 January, 2022