Interest-Only Mortgage

Lower monthly payments, but a bigger final responsibility.

An interest-only mortgage allows you to pay the interest on your borrowing during the mortgage term, while the original capital remains outstanding. Understand how it works, how repayment plans fit in and what to consider before choosing this type of mortgage.

Estimate Mortgage Payments → Compare Mortgage Types
MONTHLY PAYMENT Interest focused
Mortgage structure Interest only
Capital balance £250,000 Illustrative borrowing amount
Monthly payment Interest Capital not normally reduced
At term end Capital due Repayment strategy required
KEY QUESTION How will the capital be repaid?
Modern home interior representing mortgage planning
THE MAIN DIFFERENCE The capital stays outstanding. Monthly payments generally cover the interest, so a separate strategy is needed for the original loan.
Mortgage Explained

What is an interest-only mortgage?

With an interest-only mortgage, your regular mortgage payment is designed to cover the interest charged on the amount borrowed rather than paying down the capital in the same way as a standard repayment mortgage.

This can result in lower monthly payments during the interest-only period. However, the amount originally borrowed does not normally reduce through those payments.

When the mortgage term ends, the outstanding capital still needs to be repaid. This makes the repayment strategy one of the most important parts of an interest-only mortgage.

01 Monthly payments generally cover the interest rather than steadily reducing the capital.
02 The original borrowing can remain outstanding throughout the mortgage term.
03 You need a credible plan for repaying the capital at the end of the term.
How It Works

An interest-only mortgage has two separate responsibilities.

Understanding the difference between paying the interest and repaying the capital is essential when considering this type of mortgage.

01

Borrow the capital

You borrow an agreed amount to purchase or refinance a property, subject to the lender's criteria.

02

Pay the interest

Your scheduled mortgage payment generally covers the interest charged on the outstanding balance.

03

Maintain the plan

A separate repayment strategy needs to remain on track throughout the mortgage term.

04

Repay the capital

At the end of the term, the outstanding capital must be repaid using the agreed repayment strategy.

The Capital Does Not Disappear

Lower monthly payments do not mean the debt has been cleared.

This is the most important concept to understand. On a standard repayment mortgage, each payment normally contributes towards both interest and capital.

With an interest-only arrangement, the capital can remain unchanged unless you make separate payments towards it. The full outstanding amount therefore needs to be considered when planning for the end of the mortgage term.

Illustrative mortgage balance Capital outstanding
Starting balance £250,000
At the end of the term £250,000* Illustrative example only
! The example demonstrates the concept of an unchanged capital balance. Actual mortgage arrangements can differ depending on payments, overpayments and product terms.
Benefits & Considerations

Why might someone consider an interest-only mortgage?

Interest-only mortgages can have lower scheduled payments, but that benefit needs to be weighed against the responsibility of repaying the capital separately.

+

Potential advantages

The structure may appeal to borrowers who have a suitable repayment strategy and meet the lender's eligibility requirements.

✓ Scheduled monthly payments can be lower than a comparable capital-and-interest mortgage.
✓ The structure may provide cash-flow flexibility for certain borrowers.
✓ Some borrowers may have assets or a separate strategy intended to repay the capital.
!

Important risks

The lower monthly payment does not remove the underlying debt and can create a significant repayment responsibility later.

→ The full capital normally remains due at the end of the mortgage term.
→ Your repayment strategy may not produce enough money to clear the mortgage.
→ Investment values can rise and fall, so an investment-based repayment strategy carries risk.
→ Remortgaging may become difficult if your circumstances or repayment plan change.
Financial planning and savings strategy for mortgage repayment
PLAN AHEAD Your repayment strategy matters from day one.
Repayment Strategy

How can the capital be repaid?

A lender will generally want to understand how you intend to repay the capital. The exact repayment strategy accepted can vary between mortgage providers.

01 Savings: A planned savings strategy may be used where the product and lender allow it.
02 Investments: Certain investments may form part of a repayment plan, although values can rise or fall.
03 Asset sale: Some borrowers may intend to use another asset to repay the capital, subject to their circumstances.
04 Property plans: Selling or refinancing a property may be part of a strategy, but future property values and lending conditions cannot be guaranteed.
Compare Mortgage Structures

Interest-only vs repayment mortgage

The main difference is what happens to the capital during the mortgage term.

INTEREST-ONLY

Interest-Only Mortgage

Regular payments generally cover the interest while the capital remains outstanding and is repaid separately.

Monthly payment Potentially lower
Capital Normally remains
REPAYMENT

Capital & Interest Mortgage

Each scheduled payment generally includes interest and an amount towards reducing the capital balance.

Monthly payment Potentially higher
Capital Gradually reduces
Continue Your Mortgage Research

Explore related mortgage resources.

Continue learning about mortgage structures, repayment options and the wider borrowing process.

MORTGAGE TYPES

Mortgage Types

Explore different mortgage structures and understand how their repayment arrangements differ.

Explore Mortgage Types → MORTGAGE GUIDE

Mortgage Guide

Learn about deposits, affordability, mortgage rates, terms and other important considerations.

Read Mortgage Guide → CALCULATOR

Mortgage Calculator

Estimate potential mortgage repayments using your borrowing amount, rate and mortgage term.

Calculate Payments → FIXED RATE

Fixed-Rate Mortgage

Understand how a fixed interest rate can provide greater payment certainty for an agreed period.

Explore Fixed Rates →
Frequently asked questions about interest-only mortgages
Frequently Asked Questions

Interest-Only Mortgage FAQs

Clear answers to common questions about monthly payments, capital repayment and mortgage planning.

An interest-only mortgage is a mortgage where the scheduled monthly payment generally covers the interest on the borrowing rather than repaying the capital in the same way as a repayment mortgage. The capital normally remains outstanding until it is repaid separately.
They can be lower than payments on a comparable capital-and-interest mortgage because the scheduled payment generally does not include regular capital repayment. However, the outstanding capital still needs to be repaid.
You need a suitable repayment strategy for the outstanding capital. Depending on the product and lender, this could involve savings, investments, other assets, property plans or another accepted repayment method.
The outstanding capital needs to be repaid according to the mortgage terms. If your repayment strategy does not provide enough funds, you may need to consider other options such as refinancing, selling the property or discussing alternatives with your lender.
It can cost more in total interest than a comparable repayment mortgage because the capital is not being reduced through the scheduled payments. The overall cost depends on the interest rate, term, fees and how the capital is eventually repaid.
It may be possible depending on your lender, circumstances and mortgage terms. Switching to capital repayment can increase your monthly payments, particularly if there is less time remaining on the mortgage.

Lower payments can help today, but plan for the capital.

Understand the structure, assess your repayment strategy and compare mortgage options before deciding whether an interest-only mortgage fits your circumstances.

Estimate Mortgage Payments → Compare Mortgage Types
Scroll to Top