Back

What is an Interest-Only Mortgage?

Sep 03, 2024
Mortgage on House
There are two main types of mortgages: repayment and interest-only. In this guide, we’ll break down what an interest-only mortgage is and how it works. We’ll also cover the pros and cons to help you decide whether an interest-only mortgage is right for you.

What is an interest-only mortgage?

When you take out a mortgage, you must repay the loan amount and the accrued interest over a specified period (usually 25 years or more). With interest-only mortgages, you make monthly payments covering only the interest without paying down the borrowed amount from your lender. However, at the end of the loan term, you still owe the amount you borrowed and must repay it.
 

How do interest-only mortgages work?

When you take out an interest-only mortgage, your lender charges you monthly payments. These payments cover the interest and last for the duration of your mortgage term. During this period, you are not required to repay any of the borrowed amount. 
 
At the end of your mortgage term, you must repay the lender the entire borrowed amount. For instance, if you borrowed £150,000, you would need to pay back the full £150,000. You can do this by making a lump-sum payment or refinancing with a new mortgage – known as remortgaging. 
 

Pros of interest-only mortgages

Interest-only mortgages have several advantages, including: 
 
• Lower monthly payments: You only pay the interest portion each month, resulting in cheaper costs.


• Buy-to-let convenience: These mortgages are particularly convenient for buy-to-let properties, as they allow you to minimise monthly costs until you sell the property at the end of the term.


• Switching flexibility: Many lenders allow you to switch from an interest-only mortgage to a repayment mortgage.
 

Cons of interest-only mortgages

There are also some disadvantages to interest-only mortgages, including:
 
• Long-term cost: With interest-only mortgages, you pay more in the long run. The interest is calculated on the full loan value, which remains constant throughout the term.

 

• Full end-of-term repayment: Once the mortgage term concludes, you must repay the entire borrowed amount because you won’t have chipped away at the debt with your monthly payments.

 

• Property value risk: If house prices fall, your mortgage amount may be more than the property’s value. This may leave you with negative equity, a risk specific to interest-only mortgages.

 

• Limited availability: Interest-only mortgages can be more difficult to obtain, as only some mortgage lenders offer them.
 

How is an interest-only mortgage different to a repayment mortgage?

There are some key differences between interest-only and repayment mortgages, and it’s all down to the way you pay for them. 

 

  Interest-only mortgage  Repayment mortgage
Monthly payments  Only cover the interest charged on your loan.
 Cover the interest and part of the loan amount.
Loan repayment  You must pay the full loan amount at the end of the term.
 You gradually reduce the loan amount with monthly repayments until you own your property outright, with no remaining debt.
Overall cost  Higher overall cost due to interest % being calculated on the full value of the property.
 Lower overall cost as interest % is only calculated on the remaining loan value.
 
Browse modern 2 bedroom to 5 bedroom homes across the UK and unique homebuying offers to help you move. 
 
Visit or contact our Sales Advisers today to get started. 
 

Related Articles