What is an interest-only mortgage?

An interest-only mortgage lets you pay just the monthly interest without reducing the capital, keeping your payments lower and more affordable than a repayment mortgage. The flip side is that you’ll still owe the full loan amount at the end of the term, so you’ll need to make sure you plan for some way to repay it when the time comes.

People typically choose this option when arranging an interest-only buy-to-let mortgage, or they want to keep monthly payments as low as possible on a residential mortgage. When applying, lenders will check your income, credit score, and property value to decide how much you can borrow.

Interest-only mortgages can be a great way to reduce your monthly outgoings, but they do need careful planning. As long as you factor in the long-term view of your property investment, interest-free could be a good fit for you.

Are you eligible for an interest-only mortgage?

Ready to take out an interest-only mortgage? Let’s make sure you’re in the best position to secure the best deal. Here’s what lenders usually look for:

Equity

You’ll need a decent deposit that could be more than would be needed for a repayment mortgage - typically 20-25% or more.

Income and affordability

Lenders will assess your income and outgoings to ensure you can afford the interest payments. Typically, you can borrow up to four and a half times your annual income with a mortgage.

Repayment strategy

You’ll need to have a clear plan for paying off the loan at the end of the term, like selling the property or using savings or investments.

Credit score

Whilst there isn’t a specific credit score required for a mortgage, having a higher score can improve your chances of being accepted.

Every lender is different, so it's a good idea to compare options to find the one that fits your needs.

The pros and cons of an interest-only mortgage

An interest-only mortgage can be a tempting option, but like anything money-related, it’s not all plain sailing. Here’s a quick look at the ups and downs to help you weigh things up:

Pros:

  • Lower monthly payments: Because you’re only paying the interest each month (not chipping away at the loan itself), your monthly bills will likely be cheaper than with a full repayment mortgage.

  • More cash to play with: That monthly saving could free up money for other priorities – like putting more into investments, saving for the future, or even buying another property.

Cons:

  • You still owe the full loan at the end: Once the mortgage term ends, you’ll need to repay the entire amount you borrowed.

  • You’ll need a solid repayment plan: It’s important to regularly check your plan for repaying the loan. If things change or don’t go to plan, you could be left with a big bill and no way to pay it.

  • Income requirements: To arrange an interest-only mortgage on a home you intend to live in, you may need to earn more income than would be the case for a repayment mortgage. For example, some lenders require a minimum income of £75,000, or a combined joint income of £100,000. If you are looking at this option for a buy-to-let property, you’ll typically need a rental income of at least 125% of the monthly repayments on your mortgage.

  • You could end up paying more interest overall: Since you’re not reducing the loan over time, you’ll be paying interest on the full amount for the whole term. That could see you paying more interest than you would with a repayment mortgage.

How much can I borrow with an interest-only mortgage?

When considering an interest-only mortgage, the amount you can borrow depends on several factors, including your income, the equity in your home, and your ability to comfortably make monthly interest payments. Here's a breakdown:

Income and affordability

Lenders typically allow you to borrow up to 4.5 times your annual income, or combined salary if a joint mortgage. Some providers may allow you to borrow even more than this.

Property value and equity

The equity in your home plays a significant role. Interest-only mortgages tend to need you to have more equity (a smaller LTV) than with typical repayment mortgages. You may be able to borrow as much as 80% of your property's value with an interest-only mortgage, but it could be less with some lenders.

Deposit size

A larger deposit can enhance your borrowing power and may unlock better interest rates.

It's essential to have a clear strategy for repaying the loan's capital at the end of the term, as the principal balance remains unchanged throughout the mortgage period. Regularly reviewing your repayment plan and consulting with mortgage advisers can help ensure you secure the best deal tailored to your financial situation.

What kind of repayment plan do I need for an interest-only mortgage?

To get an interest-only mortgage, you’ll need to show your lender that you’ve got a solid plan for paying off the capital at the end of the term. They’ll check this as part of their affordability assessment.

You could use things like:

  • Savings in an account or ISA (just double-check with your lender, as not all accept this).

  • Stocks and shares ISAs.

  • Pensions.

  • Investment bonds.

  • Other properties or assets.

But, just so you know, you can’t rely on things like an inheritance or bonus as your repayment plan. Also, your lender may check in regularly to make sure your plan is still on track. So, be careful not to dip into your savings once your mortgage is approved – it’s probably best to keep that pot safe!

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Page updated on 24th September 2025, Reviewed by Richard Groom