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Are interest-only mortgages a good idea?

How they work, should you get one and how to repay

Kit Sproson
Kit Sproson | Edited by Hannah McEwen
12 July 2024

Interest-only mortgages are far less common than they used to be – currently making up just 10% of all mortgages. They're also much harder to be accepted for, so if you're considering one, it's important to understand how they work. This guide talks you through what they are, who can apply for one – and what to do if you've already got an interest-only mortgage that needs paying off.

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Struggling to pay your mortgage?

This guide is aimed at those who are considering buying a property with an interest-only mortgage.

If you've already got a mortgage that you're struggling to repay, you might be able temporarily switch your mortgage to interest-only. If you want to know more about this, as well as other means of mortgage support, see our Struggling to pay your mortgage? guide.

How do interest-only mortgages work?

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Generally speaking, mortgages fall into two different categories: 'capital repayment' and 'interest-only'.

Capital repayment mortgages make up the vast majority of mortgages these days (88%). With a capital repayment mortgage, each month you repay some of the money you borrowed plus the interest until the mortgage is completely paid off. Our What mortgage to choose? guide explains more on how they work.

Interest-only mortgages work differently in that you repay the interest each month but not the money you've borrowed. This means:

  • You won't be chipping away at your actual debt. So, when the term ends on a £150,000 interest-only mortgage – for example, after 25 years – you would still owe £150,000.
  • You'll normally have to pay back the actual mortgage debt in one lump sum. So when first applying for an interest-only mortgage, you'll need to prove to the lender that you've got a solid plan for paying off the debt at the end of the mortgage term.

  • The monthly repayments work out cheaper than they would on a capital repayment mortgage for the same amount of borrowing, as you're only repaying the interest...

  • ...but the overall, long-term cost will be much higher. That's because you're not actually reducing the debt each month, meaning more interest accrues.

To get a sense of how the cost of interest-only mortgages compare to capital repayment mortgages, use our Basic mortgage calculator. Enter the details of a mortgage deal you've found (or make one up) and switch between the 'interest-only' and 'repayment' options – or simply read on as we'll discuss this in more depth later.

Who can get an interest-only mortgage?

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Getting accepted for any mortgage can be challenging. 

You'll improve your chances of getting a mortgage if you've got a decent deposit, are able to prove you could afford the repayments (lenders will test your 'affordability') and smooth out any creases which exist in your credit report. See our Boost your mortgage chances guide for 17 ways to get yourself mortgage ready.

And there'll be extra hoops to jump through if you apply for an interest-only mortgage – mainly because the eligibility criteria is tougher. Here are some of the reasons why: 

  • You'll need a big deposit (at least 20%, and in some cases as much as 50%). So on a £300,000 property, 20% would be equivalent to a £60,000 deposit. Even with a 20% deposit though, there aren't many deals available – the number increases if you've got at least a 25%, 30% or 40% deposit. Some lenders require a minimum of 50%.
  • Fewer lenders offer interest-only mortgages, meaning there's not a great deal of choice. Compared with capital repayment, there are far fewer lenders in the interest-only market. So your choice of lender will be limited, and currently includes: Halifax, NatWest, Yorkshire Building Society and Clydesdale Bank – and some smaller lenders.
  • Interest rates on interest-only mortgages tend to be higher. You can see what kind of interest-only mortgage rates are available by using our Mortgage best buys tool.

  • You're more likely to be accepted if you're a higher earner. Lenders that do offer interest-only mortgages tend to have higher minimum income requirements. For example, Halifax and NatWest both require a minimum income of £75,000 for solo applicants and £100,000 for joint applicants.
  • You'll need evidence of how you'll repay the mortgage in future. A lender will want to see solid proof of how you're going to repay the mortgage lump sum at the end of the term. The bigger the mortgage, the tougher this could be – more on this below.

How can I prove I'm able to repay the mortgage lump sum?

In technical terms, this is referred to as having a 'repayment vehicle' in place.

The kinds of repayment vehicles deemed acceptable can vary by lender. Some lenders might allow you to combine more than one repayment method. These methods could include:

  • Stocks and shares, or other investments. Cash from a stocks and shares account or other type of investment. See Stocks and shares ISAs, Robo investing, Funds and Share dealing.

  • Other assets and properties. For example, if you own – or you expect to come into ownership of – another property or valuable asset.

  • Pension pots. Where you expect to have a large pension pot in future and could access the money by the time mortgage term expires. See our guides on Pensions.

How much do interest-only mortgages cost?

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While interest-only mortgages can mean cheaper monthly payment than capital repayment mortgages, they're vastly more expensive overall. And the longer you've got an interest-only mortgage for, the more expensive it becomes.

The difference in cost between the two types of mortgage over, say, 25 years could easily be £10,000s. It might even amount to £100,000+. Got a 30, 35 or 40-year mortgage term? The difference in cost will likely be even bigger.

So, even if you're confident you'd be able to get an interest-only mortgage, you should seriously consider whether it's wiser to choose a capital repayment mortgage.

Why an interest-only mortgage could cost you £10,000s EXTRA – possibly more than that – over the long run

While a capital repayment mortgage will cost you more each month, at the end of the mortgage term you'll have completely cleared your debt and will be mortgage-free.

With an interest-only mortgage, at the end of the term you'll still owe the mortgage balance in full. So if you borrow £200,000 over a 25-year term and only pay the interest, after 25 years you'll still owe £200,000.

Not only that, but the fact your mortgage balance isn't reducing means you'll pay more interest overall – possibly £10,000s more. That's because interest is being charged on a mortgage balance which remains the same, unlike with a capital repayment where the mortgage balance gradually reduces (meaning less interest can accrue).

 

Let's imagine you've applied for a £200,000 mortgage. You've got a choice between an interest-only and capital repayment mortgage, both charging an interest rate of 5%. The mortgage term is 25 years:

  • Each month: the capital repayment mortgage would cost £1,170, while the interest-only mortgage would cost £834 – a difference of £336.
  • Over 25 years: the capital repayment mortgage would cost £350,882 to repay, of which £150,882 would be interest. The interest-only mortgage would cost £450,182, of which £250,182 would be interest – a difference of £100,000 in interest payments.

Where the mortgage term is longer than 25 years, the difference in cost would be even more pronounced, as interest will have more time to accrue. Use our Basic mortgage calculator to see how the cost of an interest-only mortgage compares to that of a capital repayment mortgage.

One way of partially (or even fully) offsetting the extra cost of an interest-only mortgage is by putting some or all of the money you're saving on your lower monthly mortgage repayments into savings. Use our savings calculator to see how much interest it's possible to earn, plus browse what interest rates are currently available in our Best savings account guide.

How can I reduce the cost of my interest-only mortgage?

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Technically you don't need to pay off an interest-only mortgage until the term comes to an end – for example, after 25 years. But, from a money-saving perspective, you should seriously consider paying off your interest-only mortgage (at least in part) well before the term ends.

The risk of not trying to reduce the balance you owe is that you'll be left with a large lump sum to pay off in future. You might need to sell your home in order to do so – something you could be forced to consider if your original repayment strategy hasn't worked out and you're facing a payment shortfall.

There are different ways you can start paying off your interest-only mortgage early. We discuss these below, but first it's best to...

Contact your lender if you're thinking about repaying part (or all) of your interest-only mortgage early

As each lender is different, getting in touch means you can establish which ways it will allow an interest-only mortgage to be repaid (be mindful in most cases lenders have to check you can afford to start to repaying – and there's no guarantee lenders will see things that way).

Below are some options your lender might consider:

Option 1. Switch to capital repayment for term remainder

Your lender might let you switch your mortgage from interest-only to capital repayment for the remainder of the mortgage term.

This means your monthly repayments would increase – likely by a significant margin – in order for the mortgage balance to have been cleared by the end of the term. Your lender will carry out an affordability test before it agrees to this.

  • Worked example: switching to capital repayment

    On an interest-only mortgage of £125,000, with a 3% interest rate, over a term of 25 years, your monthly payments would be £313.

    • Remaining on interest-only for the full 25 years would cost you a total of £218,750.
    • Switching to capital repayment after 10 years means your new monthly payments would be £864 (an increase of £550). But the total cost of your mortgage would drop to £192,881 (a saving of £26,000).
    • Switching to capital repayment after 15 years means your new monthly payments would be £1,208 (an increase of £900). But the total cost of your mortgage would drop to £201,092 (a saving of £18,000).

Option 2. Switch to capital repayment AND extend the term

Where you'd like to switch to capital repayment but cap how much your new monthly payments increase by, you could extend your mortgage term at the same time as switching to capital repayment.

This would have the effect of limiting how much your new monthly payments increase by – however it would also limit the savings made from switching to capital repayment. In other words, you make a bigger overall saving from switching to capital repayment and keeping your mortgage term the same.

In fact, switching to capital repayment and extending the term could mean the overall cost of your mortgage actually becomes more expensive than had you remained on an interest-only basis. The trade-off is that at least at the end of the term there won't be a lump sum to repay. 

  • Worked example: switching to capital repayment and extending

    On an interest-only mortgage of £125,000, with a 3% interest rate, over a term of 25 years, your monthly payments would be £313.

    • Remaining on interest-only for the full 25 years would cost you a total of £218,750.
    • Switching to capital repayment after 15 years and extending your term by five years (30 years) means your new monthly payments would be £863 (an increase of £550). But the total cost of your mortgage would drop to £211,585 (a saving of £7,165).
    • Switching to capital repayment after 15 years and extending your term by 10 years (35 years) means your new monthly payments would be £693 (an increase of £380). The total cost of your monthly would increase to £222,577 (an increase of £3,827).
    • Switching to capital repayment after 20 years and extending your term by five years (30 years) means your new monthly payments would be £1,208 (an increase of £895). The total cost of your mortgage would increase to £219,842 (an increase of £1,092).
    • Switching to capital repayment after 20 years and extending your term by 10 years (35-years) means your new monthly payments would be £864 (an increase of £551). The total cost of your mortgage would increase to £230,381 (an increase of £11,631). 

Option 3. Repay a lump sum AND switch to capital repayment

Another option is to reduce your balance by paying off a lump sum while simultaneously switching to capital repayment for the rest of the mortgage term.

Beyond paying off your interest-only mortgage early in one fell swoop, this is the most cost-saving measure. However, the overall saving you make will be reduced if you opt to extend your mortgage term on top of paying a lump sum and switching to capital repayment. 

Be mindful that whilst most lenders allow mortgage overpayments (in other words, lump sum payments), this is typically capped at 10% each year. Breach this overpayment limit and you might be hit with an early repayment charge – something which could cost £1,000s, so watch out.

Yet even if you would have to pay an early repayment charge, it still might make financial sense to reduce your mortgage balance with a lump sum. If unsure, speak to your lender. 

  • Worked example: pay lump sum and switch to capital repayment

    On an interest-only mortgage of £125,000, with a 3% interest rate, over a term of 25 years, your monthly payments would be £313.

    • Remaining on interest-only for the full 25 years would cost you a total of £218,750.
    • Making a lump sum payment of £12,500 and switching to capital repayment after 15 years means your new monthly payments would be £1,086 (an increase of £773). But the overall cost of your mortgage would drop to £211,570 (a saving of £7,170).
    • Making a lump sum payment of £50,000 and switching to capital repayment after 15 years means your new monthly payments would be £724 (an increase of £411). Even if you had to pay, for example, a £3,000 early repayment charge, the overall cost of your mortgage would still drop to £196,119 (a saving of £22,631).

What if I fail the affordability checks?

In most cases switching to capital repayment will involve an affordability check. That's because the switch will increase your monthly payments, so your lender will need to check you could manage it.

As there's no guarantee you'll pass this test, there's no guarantee you'll be able to switch to capital repayment even if you want to.

Yet if you fail the affordability test – or don't think it's worth applying as you believe you'll fail it – it's still checking with your lender what other options it might offer.

Some lenders allow switching to 'part-part', which is where you repay a reduced amount of capital (the money you borrowed) each month. Others might allow you to switch mortgage deal, penalty-free, meaning you could possibly get a better interest rate or a deal with more flexibility.

An alternative is simply to overpay your interest-only mortgage. Regularly overpaying can have a similar effect to switching to capital repayment, but with the added flexibility of not tying you in to repaying the capital each month. There'll normally be a limit though on how much you can overpay by each year – otherwise you risk being stung with an early repayment charge – so it's best to ask your lender how much you're able to overpay annually.

You can see the impact of overpaying a mortgage by using our Overpay your mortgage calculator.

My interest-only mortgage is ending but I can't repay it. What should I do?

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It may be that when you first took out your interest-only mortgage all those years ago you had a solid repayment plan in place. But circumstances can change over time, meaning you may no longer feel confident of being able to repay when the time comes. In other words, you're facing a payment shortfall.

If this is you, don't just ignore the situation and hope it goes away. The best thing to do is get in touch with your lender – sooner rather than later. The quicker you act, the more options your lender's likely to be able to offer you.

Simply speaking to your lender about your situation will have no impact on your credit report, so don't let worries like that hold you back. And remember, repossession – where a lender takes ownership of your home – is treated as a measure of last resort by lenders, so don't ignore the situation out of a misplaced fear you'll lose your home. 

Some of the options your lender might offer include:

  • Extend your mortgage term and convert the mortgage from interest-only to capital repayment (either fully or partly).
  • Extend your mortgage term by a short period in order for you to sell your property or cash in investments.
  • Remortgage on an interest-only basis (likely to be age dependent).
  • Repay the interest-only mortgage in a number of lump sums rather than in one go.

Where your current lender isn't able to offer a solution you might be able to switch lenders instead. You should speak with a mortgage broker to see if this is possible.

If you don't want to reach out to your lender yet – or it can't help and switching lenders doesn't help either – you should consider getting free debt advice from the likes of Money Helper, Citizens Advice or StepChange. An advisor will be able to talk you through your options.

Equity release and retirement interest-only mortgages (RIOs)

Other ways of potentially paying off your interest-only mortgage include through equity release or a retirement interest-only mortgage (RIO). Both these options should be treated with caution though, particularly equity release, which can be a very expensive way of raising cash.

The cash you raise would be used to pay off your existing interest-only mortgage, after which you'll essentially be left with a new type of mortgage (that'll typically last until death or you moving into long-term care).
 
If you're considering equity release you'll need to consult a qualified equity release adviser first. More details about how equity release works and where to find an adviser in our our Should you equity release? guide. To learn more about RIOs, you should speak with a mortgage broker.
 
Where you're feeling overwhelmed by the different options or aren't sure which is best for you, consider getting free debt advice from the likes of MoneyHelper, Citizens Advice or StepChange.

Nearly 1 million interest-only mortgages need repaying


A report published by the Financial Conduct Authority has found that there are currently 990,000 homeowners with interest-only mortgages (including 245,000 part-part mortgages).

Most of these are set to expire over the next 10 years, including: 51,000 in 2027, 72,000 in 2031 and 77,000 in 2032. Of these 990,000 mortgages, the median amount borrowed is £140,000. Some 46% have a balance worth over £150,000, while 18% owe more £300,000.

The FCA report suggests that a significant number of these borrowers feel unsure whether they'll be able to repay their interest-only mortgage.

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