An interest-only mortgage is one where your monthly payments cover only the interest the lender charges, and none of the loan itself. The capital, the amount you borrowed, is repaid in a single lump sum at the end of the mortgage term1. The trade is simple: the monthly payments are lower than on a repayment mortgage, but the debt does not shrink by a penny over the whole term, so you still owe the full amount you borrowed on the final day2.
These mortgages are now a small and shrinking part of the market. There were 445,000 pure interest-only homeowner mortgages outstanding at the end of 2025, 17.7 per cent fewer than the year before3, and customers with interest-only mortgages make up only around ten per cent of all borrowers4. They are still available, but lenders apply strict criteria and require evidence of a credible plan for repaying the capital before they will agree to lend5.
How an interest-only mortgage works: you pay the interest, not the loan
On an interest-only mortgage you pay back the interest on a monthly basis and repay the capital at the end of the mortgage term1. The monthly payments comprise only the interest and do not include anything towards the original loan amount10. Because the balance never falls, the interest charged each month is worked out on the full amount you borrowed for the entire term, which is why the total cost of interest is higher than on a repayment mortgage.
A worked example shows the arithmetic. On a £300,000 loan at 5% interest, the monthly payment would be £1,250, because the whole balance stays outstanding and the interest is charged on all of it, every month, for the whole term11. Nothing from that £1,250 reduces the debt. At the end of the term, the £300,000 has to be found from somewhere else: savings, an investment, a pension lump sum, the sale of the property or another asset.
That is why the repayment vehicle, the plan for repaying the capital, matters more than the rate. It is very important that the borrower has a suitable repayment vehicle in place to repay the capital at the end of the term10. Interest-only mortgages are slightly more risky than repayment ones, because there is no guarantee that the proceeds from an endowment, ISA or other policy will cover the whole sum you borrowed in the first place1.
Interest-only mortgages are available with fixed and variable rates, so the structure can be combined with any of the main rate types, including fixed rate, tracker and standard variable rate deals7. You can apply direct through a lender or through a mortgage broker, and some deals are only available through brokers7. The rate type changes what you pay each month; it changes nothing about the rule that the capital falls due in one go at the end.
Interest-only or repayment: monthly cost against total cost
The choice between interest-only and repayment is a trade between monthly cost and total cost. With an interest-only mortgage you only pay the interest each month, meaning you have to pay off the entire loan at the end of the mortgage term12. With a repayment mortgage, each payment covers interest plus a slice of the loan itself, so the balance shrinks, and less total interest is paid because the balance shrinks6.
Which? gives a worked comparison on a £250,000 mortgage charging 3% over 25 years. On the interest-only basis you would repay £625 a month, equating to £187,500 over the term, and you would still owe the full £250,000 at the end. On the same terms, a repayment mortgage would cost £105,800 in interest in total, making it £81,700 cheaper than the interest-only mortgage7.
| Interest-only | Repayment | |
|---|---|---|
| Monthly payment | £625 on the example above7 | Higher, because it includes capital |
| Balance at the end | The full £250,000 borrowed7 | Nothing |
| Total interest over 25 years | £187,500 on the example above7 | £105,800 on the same terms7 |
| Repayment plan needed | Yes, before the lender agrees8 | No, the payments clear the debt |
Monthly repayments are lower than on repayment mortgages, which is the whole attraction, particularly for borrowers whose income is irregular or who are directing spare cash elsewhere12. But the lower payment is not a saving. It is a deferral: the capital is deferred to the end of the term, and the interest bill is larger precisely because the balance it is charged on never falls. The dedicated comparison page on repayment vs interest-only sets the two side by side in more detail.
On interest-only the balance is flat for the whole term; on repayment it falls steadily to nothing.
Who can get one: deposit, income and loan-to-value limits
It is now hard to get an interest-only mortgage14. They are still available, but you will need to meet very strict criteria and have an adequate repayment vehicle linked to the mortgage5. The rules were tightened after the Mortgage Market Review, which allowed a borrower to take out an interest-only mortgage only where there is a credible repayment strategy in place15.
The practical limits are about loan to value and income. Typically lenders will only allow you to borrow up to 50% of the property value on a residential interest-only basis, so you will need a large deposit or a lot of equity in your home7. Some lenders will also only lend on an interest-only basis to high-net-worth individuals with incomes of £100,000 or more7. The loan to value page explains how that ratio is worked out.
Buy-to-let is the exception. The rules on buy-to-let interest-only mortgages are less strict, because interest-only borrowing is standard for these purchases7, and buy-to-let mortgages are generally interest-only rather than repayment16. Typically these mortgages suit buy-to-let investors or people with a clear repayment strategy6. A lender may also refuse to let you switch to interest-only if your mortgage is already in arrears17.
A part and part mortgage sits between the two: part of the loan is on an interest-only basis and part on a repayment basis, so the balance falls slowly and a smaller lump sum is left at the end. The FCA's rules read a reference to an interest-only mortgage as including any regulated mortgage contract which includes an interest-only period, or where part of the sum is advanced on an interest-only basis9, so the same rules on repayment strategies apply to part and part loans.
A lender must see a credible repayment plan before it will agree
The core rule is set by the FCA. A mortgage lender may only enter into an interest-only mortgage, or switch a repayment mortgage onto an interest-only basis for all or part of its term, if it has evidence that the customer will have in place a clearly understood and credible repayment strategy, and, as far as it is reasonably able to assess at that time, that the strategy has the potential to repay the capital borrowed and any interest reasonably expected to be accrued8.
Where a firm identifies an interest-only mortgage as appropriate, it must also ensure the customer is aware that he will have to demonstrate to the mortgage lender that he will have in place a clearly understood and credible repayment strategy18. In practice this means the plan is checked at the point of application, not left until later. You can use money from different sources to meet the payment, such as an endowment policy or savings2.
The rule bites hardest on remortgaging. A firm may not treat a remortgage with the same or a different lender with no additional borrowing as a straightforward switch where the existing contract is a repayment mortgage and the proposed contract is interest-only, or where the capital outstanding at the end of the proposed contract may be higher than under the existing contract19. So a borrower cannot quietly convert a repayment mortgage to interest-only at remortgage without the full credibility test being applied.
There is one carve-out for hardship. The rule does not prevent a mortgage lender, when appropriate, from making a temporary concession, by which it accepts payment of interest only from a customer who is in arrears, has a payment shortfall, or is at risk of arrears or a payment shortfall9. This is a concession for difficulty, not a change of mortgage type, and the arrears guidance pages cover how it works.
Repayment strategies lenders accept, and ones they refuse
The FCA's rules give examples of acceptable repayment strategies: regular deposits into a savings or investment product; the periodic repayment of capital from irregular sources of income; and the sale of assets such as another property or other land. For a shared equity credit agreement or a retirement interest-only mortgage, the sale of the property which is the subject of the agreement is acceptable20. Independent guidance lists the same range for residential lending: a savings plan, an investment portfolio, a pension or other assets you plan to sell7.
The rules are equally clear about what a lender must not accept. A mortgage lender must not accept speculative repayment strategies8. The examples given in the rules are:
- an expectation that the value of the property which is the subject of the mortgage will increase over its term
- an intention to utilise an expected, but uncertain, inheritance
- the sale of the customer's main residence, without considering whether it can repay the capital and allow purchase of a cheaper property9
Capital growth, where you count on the value of your property rising over the term of the mortgage, is not usually an acceptable strategy for residential lending, though it can be used on buy-to-let deals7. The inheritance rule is the one that catches most people out: a gift or inheritance that is expected but not certain cannot be the plan.
Where a lender agrees to lend interest-only, it may assess affordability on the basis of payment of interest only over the term, plus repayment of such capital as may be due over the term, and it must consider the cost of the repayment strategy as committed expenditure20. In other words, whatever you pay regularly into a savings or investment product to build the repayment fund, the lender treats that cost as a committed one when it works out whether you can afford the mortgage. The exception is retirement interest-only mortgages, where the lender need not consider the cost of the repayment strategy21.
The narrow page on what repayment strategies lenders accept goes through each option in detail.
Overpayments and early repayment charges
Because the balance on an interest-only mortgage never falls by itself, overpayments are one of the few ways to reduce the debt during the term. The rules on charges mirror those on any other mortgage. If you are still in your initial fixed or tracker period, you may be charged an early repayment charge for overpaying22. Once the initial period has ended, you can overpay without paying an early repayment charge22.
The detail of how charges are worked out, and how much of each overpayment is free of charge during a deal period, is set out in the page on early repayment charges, and the practical mechanics of paying down the balance are covered in overpaying your mortgage. For an interest-only borrower, overpayments have a double effect: they cut the interest bill, because interest is charged on the balance, and they shrink the lump sum that the repayment strategy has to cover at the end.
Switching to a repayment mortgage
Many lenders will let you switch from interest-only to repayment6. Where a lender charges for the switch, it says so; Kensington Mortgages states there is no charge to switch your mortgage from interest-only, or part and part, to a capital repayment mortgage, and a term change can be assessed at the same time22. The switch converts the mortgage from one where the balance is flat to one where it falls every month, and the end-of-term lump sum disappears.
The cost of switching is in the monthly payment, not a fee. A repayment payment covers interest plus capital, so it will be higher than the interest-only payment on the same loan, and the earlier in the term the switch happens, the longer the capital has to be spread over and the smaller the rise. A lender will reassess affordability, because the payment is larger.
Switching the other way, from repayment to interest-only, is sometimes offered as temporary help with payment difficulties. A temporary switch to interest-only payments means you just pay the interest on your mortgage, without repaying the loan itself, for a set period of time23. Under the Mortgage Charter support, you can switch to interest-only repayments for 6 months24. These options can reduce your monthly payments now, but they cost more over the lifetime of the mortgage25. StepChange warns that switching to interest-only is not a long-term solution: you only pay the interest and must pay the capital before the end of the term26.
Lender reviews and what happens as the term ends
For interest-only mortgages entered into on or after 26 April 2014, the FCA requires a mortgage lender to carry out a review, as a minimum once during the term of the mortgage, in which contact is made with the customer, to check that the customer's repayment strategy is still in place9. The rule applies to all interest-only mortgages entered into on that date or after, except lifetime mortgages, retirement interest-only mortgages, bridging loans, and any other case where repayment of capital and interest is certain20. The review is not required only where, despite reasonable efforts to contact the customer, the lender has been unable to do so9.
In practice, lenders ask existing interest-only customers to tell them their plans. Bank of Scotland, for example, lets existing interest-only customers record or update their repayment plan through an online form that takes a couple of minutes, or by phone if they prefer to discuss their plans or have more than three separate plans27. Responding to these contacts matters, because the end of the term arrives with the full balance still owed.
Engagement is the industry's own stated worry. Although mortgage lenders are writing to customers prior to their mortgage maturing, engagement rates with firms are low28. A borrower who ignores the letters reaches the end of the term with the full capital due and no agreed way of paying it, which is the worst position to negotiate from.
The lender checks the plan at the start, reviews it during the term, and the full capital falls due at the end.
Retirement interest-only and lifetime mortgages: how they differ
Two later-life products are related to, but different from, a standard interest-only mortgage. A retirement interest-only mortgage is defined in the FCA's glossary as an interest-only mortgage which requires the interest accruing under it to be repaid in full over the stated term; entry into which is restricted to older customers above a specified age; and under which the lender is not entitled to seek full repayment of the loan until the occurrence of one or more specified life events, unless the customer breaches their contractual obligations21. In plain terms: you pay the interest monthly, and the capital is repaid when the property is sold, on death or on going into care30.
A lifetime mortgage works differently. It is very similar to a mainstream interest-only mortgage, with the main difference being that the interest is added to the account on a regular basis and rolled up over the term31: there are no monthly repayments, and the interest compounds until you die or move into residential care30. The loan plus interest is repaid from the sale of the property, either on death, or second death, of the applicants, or on a move into long term care32. Under the FCA's classification, a lifetime mortgage is a type of interest-only mortgage, because full repayment of capital and interest is not required over the term8. An interest-only lifetime mortgage is a variant that lets you borrow against your home while still living there, with the option to pay all or part of the monthly interest33.
| Retirement interest-only (RIO) | Lifetime mortgage | |
|---|---|---|
| Monthly payments | Interest, paid in full each month21 | None; interest is rolled up31 |
| When the capital is repaid | On death or going into care, when the property is sold30 | On death or moving into care, from the property sale32 |
| Minimum age | Restricted to older customers above a specified age21 | Typically available if you are over 5534 |
| Balance over time | Stays level while interest is paid | Grows, as interest compounds31 |
Borrowing limits on RIO mortgages are lower than on standard lending. As an example of lender limits, you might be able to borrow 50% of the value of your property on an interest-only basis, or 65% on a capital repayment basis35. Some RIO mortgages carry terms like a regular mortgage, meaning you either pay them back after a set number of years or by a set age, such as age 9035. Other lender requirements can include a minimum property value, minimum income and minimum loan size, with borrowing based on an affordability assessment of pension, savings or investment income35.
The pages on retirement interest-only mortgages, equity release and lifetime mortgages and RIO vs lifetime cover these products in full.
If you cannot repay at the end of the term: options and help
The borrower is still responsible for repaying the full loan amount at the end of the mortgage term10. You have to pay back all the capital at the end of the mortgage term, and the mortgage term is how long you agreed to pay back what you owe, for example 25 years34. If the repayment strategy has fallen short, because an endowment underperformed, savings were spent or an asset could not be sold, the debt does not go away: it is due, in full, on the last day of the term.
Help exists, and the earlier it is sought the more options there are. Shelter's guidance is written for people who cannot pay back what they owe and are near the end of their interest-only mortgage term, or whose term has ended already34. Depending on your circumstances, the options can include:
- Switching to a repayment mortgage, if the payments are affordable, which clears the debt over a new term6
- Extending the mortgage term, to spread the capital over more years36
- Converting to interest-only for a period, or staying interest-only, to reduce the payments while a plan is made, though this is not a long-term solution26
- Remortgaging, with the same or a different lender, subject to the FCA's restriction on moving to a contract that leaves more capital outstanding at the end19
- Selling the property, voluntarily, to repay the loan and buy or rent somewhere cheaper34
- Equity release, for older borrowers, which converts the debt into a lifetime mortgage or similar product37
If you are struggling, free debt advice is available from charities including StepChange5 and, in Northern Ireland, Advice NI36, and housing charities including Shelter and Shelter Cymru publish guidance on the options34. Independent Age offers advice aimed at older homeowners with mortgage debt12, and Macmillan has guidance for people affected by cancer14. If you are on a low income, Support for Mortgage Interest can help towards interest payments, but only if you are entitled to Universal Credit or Pension Credit38.
If payments are missed, the position escalates: the lender can add arrears charges, report the arrears to credit reference agencies, and eventually go to court for repossession. Shelter's guidance on dealing with missed mortgage payments sets out the steps a lender must follow and the help available before that point25, and the pages on mortgage arrears and repossession in England and Wales cover the process in detail. The Financial Ombudsman Service can consider complaints about interest-only mortgages, including how the lender handled the end of the term2, and in one published case the ombudsman looked at a lender selling a borrower's rented-out flat to clear a buy-to-let interest-only debt40. The narrow page what if I cannot pay off my interest-only mortgage works through the end-of-term options, and complaining about a mis-sold interest-only mortgage covers complaints about how the loan was sold.
Sources40 cited
- Repayment options for your mortgage Shelter Cymru
- Interest-only mortgages Financial Ombudsman Service
- Interest-only mortgages data UK Finance
- Household Finance Review 2024 Q2 UK Finance, 2024
- Mortgages: how StepChange helps StepChange, 2026
- Repayment mortgages Nottingham Building Society, 2026
- How to tackle your interest-only mortgage Which?, 2026
- MCOB 11: rules on interest-only mortgages Financial Conduct Authority
- MCOB 11: interest-only mortgage rules Financial Conduct Authority
- About mortgages Building Societies Association, 2023
- How do mortgage payments work Which?, 2026
- Problems paying your mortgage Independent Age, 2026
- Interest-only mortgages help Coventry Building Society, 2026
- Understanding your mortgage Macmillan, 2022
- Mortgage Market Review written evidence Parliament, 2015
- Let to buy explained Which?, 2026
- Arrears on a repayment mortgage Shelter Cymru, 2026
- MCOB 4.7A.9: interest-only repayment strategy disclosure Financial Conduct Authority, 2014
- MCOB 11.9: remortgaging with no additional borrowing Financial Conduct Authority, 2019
- MCOB 11.6: acceptable repayment strategies and reviews Financial Conduct Authority, 2018
- Retirement interest-only affordability assessment Financial Conduct Authority
- Your interest-only mortgage Kensington Mortgages, 2026
- What to do if you can't pay your mortgage Which?, 2025
- Mortgages advice and support Scope, 2026
- How to deal with missed mortgage payments Shelter England, 2026
- Mortgage arrears StepChange, 2026
- Interest-only mortgage repayment plan Bank of Scotland, 2026
- Regulator urges action on interest-only mortgages Building Societies Association, 2018
- MCOB 11 Responsible lending Financial Conduct Authority, 2023
- Over half of borrowers will still have a mortgage at 65 Which?, 2021
- What is equity release Equity Release Council, 2022
- How does equity release work Equity Release Council, 2026
- Interest-only lifetime mortgages StepChange, 2026
- Options if you cannot pay off your interest-only mortgage Shelter England, 2024
- Retirement interest-only mortgages explained Which?, 2026
- Housing-related debts Advice NI, 2026
- Releasing equity from your home StepChange, 2026
- Support for Mortgage Interest Mental Health and Money Advice, 2025
- Self-employment and benefits FAQs Turn2us, 2025
- Case study: lender sold Helen's property to clear buy-to-let mortgage debt Financial Ombudsman Service, 2026
MoneyHelperFree, impartial money and pensions guidance, set up by government
StepChangeFree debt advice and solutions from a charity
Financial Ombudsman ServiceFree, independent help when a complaint about a firm is not put right
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ShelterFree housing advice from a charity