How interest-only mortgages work
On a standard repayment (capital and interest) mortgage, each monthly payment covers the interest charged that month plus a portion of the original loan. Over the full term, you gradually reduce what you owe until the mortgage is cleared. On an interest-only mortgage, you pay only the interest each month. The capital you borrowed never reduces, so on the final day of the term you still owe exactly what you borrowed at the start.
That makes monthly payments noticeably lower in the short term, which is why the product appeals to many borrowers. However, it shifts the full responsibility of repaying the capital onto the borrower. You must build up the money separately through a savings or investment plan, and lenders now require evidence of a credible repayment strategy before they will approve the mortgage. They also tend to review that plan periodically during the mortgage term.
Interest-only lending was very widely available before the 2008 financial crisis, with minimal checks on repayment plans. The Financial Conduct Authority (FCA) tightened rules substantially afterwards, and many borrowers who took out interest-only deals in the 2000s now face a shortfall as their mortgages approach the end of their term. If you are in that position, contact your lender as early as possible: options exist, including switching to repayment, extending the term or downsizing.
Interest-only vs repayment: monthly cost and end balance
Illustrative comparison on a £200,000 loan at 5% interest over a 25-year term.
| Mortgage type | Monthly payment | Total paid over term | Balance owed at end |
|---|---|---|---|
| Interest-only | ~£833 | ~£249,900 | £200,000 |
| Repayment (capital + interest) | ~£1,169 | ~£350,700 | £0 |
| Part-and-part (50% each) | ~£1,001 | ~£300,300 | £100,000 |
Figures are rounded illustrations at a fixed 5% rate with no fees included. On interest-only the total interest paid over 25 years exceeds that of a repayment mortgage because the full capital is charged interest throughout. Always compare the lifetime cost, not just the monthly payment.
Repayment vehicles lenders accept
Before approving an interest-only mortgage, lenders require evidence of a credible plan to repay the capital. The most commonly accepted repayment vehicles are:
- Stocks and shares ISAs or a general investment account, evidenced by statements showing current value and projected growth.
- A pension lump sum: lenders typically accept up to 25% of your pension fund value as a tax-free lump sum repayment source, though they apply a discount to projected values.
- Sale of a second residential property or buy-to-let property you own outright or with substantial equity.
- Endowment policies: older arrangements that were widely used before 2000 and are now maturing for many borrowers.
- Cash savings held in a bank or savings account, though lenders check these are sufficient.
- Downsizing: selling your home and buying a cheaper property, using the difference to repay the mortgage. Many lenders accept this but cap the loan-to-value and apply minimum equity requirements.
Who can get an interest-only mortgage in 2026?
Residential interest-only mortgage availability tightened sharply after the financial crisis and has not fully recovered. Most mainstream lenders now restrict residential interest-only deals to borrowers with a loan-to-value (LTV) of 75% or lower (meaning a deposit or equity of at least 25%), a minimum income (often £75,000 or more per year with some lenders), and a repayment vehicle they will formally accept and evidence.
Buy-to-let mortgages are still widely available on an interest-only basis. Landlords commonly use interest-only because the rental income covers the monthly interest, and they plan to repay the capital by selling the property or remortgaging at the end of the term. Rental stress-test rules mean lenders assess affordability on an interest-only basis anyway.
For older borrowers aged 55 and over, a retirement interest-only (RIO) mortgage offers a specialist route. You pay the interest each month for the rest of your life (or until you move into long-term care or sell), and the capital is repaid from the sale proceeds of the property. There is no fixed end date, which removes the risk of reaching the end of a term with no repayment plan. RIO mortgages are regulated differently from standard interest-only deals and from equity release, and are worth comparing if you are in or approaching retirement.
Some lenders also offer interest-only to borrowers who have very significant assets (typically over £1 million in investable wealth) under high-net-worth or private banking criteria, applying more flexible underwriting.
Steps to take if your interest-only term is ending soon
Check your repayment vehicle balance now
Review your ISA, pension, investment or savings balance and compare it with the outstanding mortgage. If there is a shortfall, you need to act before the term ends, not after.
Contact your lender early
Lenders are obliged to work with borrowers who face a shortfall. Contact yours at least two to three years before the end of the term. Options include switching all or part of the mortgage to repayment, extending the term or agreeing a new plan.
Get independent advice
A whole-of-market mortgage broker can identify whether remortgaging to a new lender, converting to repayment or taking a RIO mortgage would suit your situation better than staying with the current deal.
Consider downsizing proactively
If the shortfall is large and your home has risen significantly in value, selling and buying a smaller property may clear the mortgage and release capital. Plan this carefully to avoid forced decisions under time pressure.
Avoid equity release as a first resort
Equity release is sometimes marketed as a solution to an interest-only shortfall, but the compounding interest on a lifetime mortgage can be very costly. Exhaust other options first and always take regulated advice if you do consider it.
Alternatives to a pure interest-only mortgage
- Repayment mortgage: higher monthly cost but the debt is guaranteed to be cleared by the end of the term with no shortfall risk.
- Part-and-part mortgage: a portion of the loan is on interest-only terms and the rest is on capital repayment. This lowers monthly payments relative to full repayment but means you still owe the interest-only portion at the end.
- Offset mortgage: your savings are linked to the mortgage and offset the balance on which interest is charged. Gives flexibility while reducing the interest cost, and can be structured as repayment or interest-only.
- Retirement interest-only (RIO): designed for older borrowers who want predictable monthly interest payments with no fixed term end date, repaying capital on death or sale.
- Equity release (lifetime mortgage): no monthly payments required, but interest compounds and significantly reduces the estate value over time. Regulated by the FCA and only suitable in specific circumstances.
The balance does not shrink: plan actively and review regularly
If your savings or investments underperform, you could reach the end of the term still owing the full original loan amount. Do not rely on rising house prices alone to cover a shortfall: lenders are not obliged to let you simply sell and repay at the last minute, particularly if you are in negative equity or the market has fallen. Review your repayment vehicle balance every year, top it up if it is tracking below target, and tell your lender immediately if you believe you will face a shortfall. The earlier you act, the more options you have.