Interest-Only Mortgages
Pay only the interest each month for lower payments. Popular for buy-to-let investors and those with strong repayment strategies.
Content reviewed: 13 January 2026
What is an interest-only mortgage and how does it work?
An interest-only mortgage means you only pay interest each month—not the capital borrowed. Monthly payments are around 30% lower, but you still owe the full loan at term end. You need a credible repayment strategy such as selling, investments, or pension. Residential interest-only typically requires a 25-30% deposit.
Expert advice on interest-only mortgage options and exit strategies.
What is an interest-only mortgage and how does it work?
An interest-only mortgage means you only pay the interest charged on your loan each month—you don't repay any of the capital borrowed. Monthly payments are significantly lower (around 30% less), but at the end of the mortgage term, you still owe the full original loan amount. You must have a credible repayment strategy such as selling the property, investments, or pension. Interest-only is popular for buy-to-let investors but requires a 25-30% deposit for residential properties.
What Is an Interest-Only Mortgage?
An interest-only mortgage means you only pay the interest charged on the loan each month—you don't repay any of the capital (the amount you borrowed). This makes your monthly payments significantly lower than a repayment mortgage, but at the end of the mortgage term, you still owe the full original loan amount.
You must have a credible plan to repay this lump sum when the mortgage ends. This could be selling the property, using investments, savings, pension lump sums, inheritance, or other assets. Lenders require evidence of this repayment strategy before approving interest-only mortgages.
Interest-only mortgages are particularly popular for buy-to-let investments where the lower monthly payments maximise rental yield, and the property itself serves as the repayment vehicle through eventual sale or refinancing.
Key Benefits of Interest-Only Mortgages
Pay only the interest each month—no capital repayment, significantly reducing monthly costs
Free up cash flow to invest elsewhere, potentially achieving higher returns than mortgage interest
Buy-to-let investors often prefer interest-only to maximise rental yield and flexibility
Useful for temporary situations where you expect a lump sum or plan to sell the property
Interest-Only Mortgage Insights: Expert Tips
Understanding repayment strategies and when interest-only makes sense
Lenders require a credible plan to repay the capital at the end of the term. Acceptable strategies include: sale of the mortgaged property, sale of another property, investments (ISAs, pensions, stocks), business sale proceeds, inheritance, or downsizing. The strategy must be realistic and evidenced. 'I'll worry about it later' doesn't meet lender criteria.
Interest-only mortgages require larger deposits than repayment mortgages. Residential interest-only typically needs 25-30% minimum deposit (70-75% LTV max). Buy-to-let interest-only is more accessible with 25% deposit (75% LTV). High-net-worth borrowers may access higher LTVs with premium lenders. The larger deposit requirement reflects the higher risk to lenders.
Interest-only is much more common and easier to obtain for buy-to-let mortgages. Most lenders offer it standard on BTL with just 25% deposit. For residential (your home), criteria are stricter—lenders want evidence of a solid repayment strategy, higher deposits, and often minimum incomes (£50k-£75k+). BTL investors benefit from lower monthly costs maximising rental yield.
Monthly payments are lower but total cost is higher. Example: £200k interest-only at 5% = £833/month, £200k owed after 25 years (total paid £249,900 + £200k capital). Same loan on repayment = £1,169/month, £0 owed after 25 years (total paid £350,700). You pay £100,800 more over 25 years on repayment BUT you own the property. Interest-only only makes financial sense if you invest the £336 difference and earn more than 5% returns.
Interest-only works best for: buy-to-let investors maximising yield, high earners with strong investment portfolios, short-term property ownership (5-10 years), those expecting large future lump sums, or temporary cash flow management. It's risky for: first-time buyers, low earners, long-term home ownership without a repayment plan, or those who won't invest the payment difference.
You can switch from interest-only to repayment any time, subject to affordability checks. Many people start interest-only to reduce initial payments, then switch to repayment once income increases. Conversely, switching from repayment to interest-only is harder as lenders will reassess your repayment strategy. Some lenders allow part interest-only, part repayment for flexibility.
Frequently Asked Questions
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