How Interest Only Works
With an interest only mortgage, your monthly payments cover only the interest charged - you don't pay down any of the capital (the amount borrowed). This means significantly lower monthly payments compared to a repayment mortgage, but at the end of your term, you'll still owe the full original loan amount.
For example, on a £200,000 mortgage at 4%, monthly payments would be around £667 for interest only versus £1,055 for repayment over 25 years. That's nearly £400 per month less - but with interest only, you'd still owe £200,000 at the end.
Repayment Vehicle Requirements
To get an interest only mortgage, lenders require a credible repayment vehicle - a plan for how you'll repay the capital at term end. Acceptable vehicles typically include: sale of the mortgaged property (with sufficient equity), sale of another property, investments or savings, pension lump sums, or endowment policies.
Lenders are strict about repayment vehicles since the 2014 Mortgage Market Review. You'll need to demonstrate how your chosen method will realistically cover the loan amount, usually with supporting evidence.
Availability of Interest Only
Residential interest only has become harder to find but isn't impossible. Many lenders restrict it to higher-value properties, require maximum 50-75% LTV, or have minimum loan sizes. Building societies and specialist lenders are often more flexible than high street banks.
For buy to let properties, interest only remains standard practice, as landlords typically plan to repay by selling the property or using other investments.
Risks and Considerations
The main risk is reaching term end without means to repay. Thousands of borrowers have faced this situation with older interest only mortgages. Regularly reviewing your repayment vehicle and ensuring it stays on track is essential.
Consider whether part-and-part (part interest only, part repayment) might offer a compromise - lower payments than full repayment while still reducing some capital each month.