Compare our best interest only mortgages

What are interest only mortgages?

With 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.

When your mortgage term ends on an interest only mortgage, you repay the full mortgage loan you borrowed at the start.

You need to be able to prove to mortgage lenders you can do this. You could pay off the mortgage with savings, other investments or the sale of the property itself.

Repayment mortgages are more common and easier to get. The monthly repayments go towards the interest and some of the principal debt. This means your payments are higher than with an interest only mortgage. But, by the end of the mortgage term, you should have paid it all off and own your home outright.

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

Interest only mortgage repayments

When it comes to interest only vs. repayment mortgages, interest only mortgages have lower monthly repayments. The catch is the remaining lump sum you have to pay at the end.

Because of this, an interest only mortgage is often more expensive in the long run because you’re not reducing the principal debt. You're paying interest on the same amount of debt every month.

So on that £200,000 interest only mortgage with an interest rate of 2.5%, the total amount you would have repaid at the end of the 25 year term is £325,000.

But for the same mortgage on a repayment mortgage basis, you'd have paid £269,000. This is because you're reducing the principal debt with each payment. By the end, most of your money goes towards paying off the capital rather than the interest.

The key to interest only mortgages is to have a clear way of paying off that final debt. The lender will want to know your repayment method before it offers you an interest only mortgage.

The simplest route is to sell the property at the end of the mortgage term and use that to pay back the lender. Many buy to let mortgages - where you buy a property specifically to rent it out - are settled in this way. In fact, buy to let are often interest only mortgages.

To avoid having to sell the property, you could 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.

Retirement interest only mortgages

There has been a new wave of interest only mortgages for those in retirement. They are 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 because your regular income will most likely be lower than when you were employed. So, it's useful to have lower monthly repayments. How much you can borrow, and the rates you're eligible for 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 use an interest only mortgage calculator?

You can use our mortgage repayment calculator as an interest only calculator. Choose the repayment type as 'interest only' to see how much you could repay each month. It is very difficult to get an interest only mortgage as a first time buyer.

Can I overpay on an interest only mortgage?

Technically you can overpay on an interest only mortgage. But before you do, talk to your lender to discuss your options. If you can afford to overpay, consider getting a repayment mortgage so you can gradually reduce the capital.

Can I get a part and part mortgage?

Yes, you can get a mortgage that is part repayment and part interest only. 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.

Can I remortgage to an interest only mortgage?

Yes. But you will need to show you have a viable way to pay off the principal amount at the end of the mortgage term.

Can I switch between repayment and interest only mortgages?

Yes, though there could be fees and other charges. You may find it difficult to switch from a repayment to an interest only mortgage because it is seen as riskier. Speak to your mortgage lender to find out more.

Compare other types of mortgage

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Last updated: 10 July, 2019