You've probably heard about interest-only mortgages and wondered if they might be right for your situation. With 541,000 pure interest-only mortgages still held by UK homeowners as of 2024, these products remain significant despite an 18.5% decline since 2023.
What is an interest-only mortgage?
An interest-only mortgage means you only pay the interest on your loan each month, not the capital amount you've borrowed. This makes monthly payments much lower than traditional repayment mortgages. However, you'll need to repay the entire loan amount in one lump sum when your mortgage term ends.
Interest-only mortgages currently make up 9% of all regulated mortgages in the UK, with 55% of these mortgages taken out before the 2008 financial crisis when lenders weren't required to check repayment plans.
Who can get one?
Eligibility criteria have become much stricter since the financial crisis. Most major lenders now require:
- Minimum income: £75,000 annually for sole applicants or £100,000 combined income for joint applications
- Maximum loan-to-value: Typically 75% LTV, though some lenders offer higher ratios for part-and-part arrangements
- Credible repayment strategy: You must demonstrate how you'll repay the capital at the end of the term
- Regular reviews: Lenders will check your repayment plan remains on track, usually around the halfway point
The pros and cons you need to consider
The advantages:
- Lower monthly payments free up cash flow for investments or expenses
- Potential for higher returns if you invest the difference wisely
- Flexibility for those with irregular income patterns
The significant risks:
- You'll owe the full loan amount at the end of the term
- Investment returns aren't guaranteed – your repayment plan might fall short
- Interest rate rises affect your entire loan balance throughout the term
- Property prices could fall, affecting your ability to sell to repay the mortgage
What repayment strategies do lenders accept?
Common accepted strategies include:
- Sale of the mortgaged property (downsizing)
- Investment portfolios (ISAs, stocks, unit trusts)
- Pension lump sums (typically 25% of projected value)
- Sale of other properties
- Endowment policies
Note that most lenders no longer accept relying solely on property price appreciation as a repayment method.
Making your decision
An interest-only mortgage isn't suitable for everyone, but it can work well if you have a solid repayment strategy, meet the strict lending criteria, and understand the risks involved. You'll need to regularly review your plans and be prepared to adapt if circumstances change.
The key is honest self-assessment: can you afford the monthly payments on a repayment mortgage, or do you genuinely need the lower payments and have a credible plan to repay the capital? The FCA's consumer research found that 82% of interest-only borrowers were confident about repaying, yet 36% expected to have a shortfall.
Our experienced advisers can help you understand whether an interest-only mortgage aligns with your financial goals. Book a consultation today to discuss your specific situation.
