On an interest-only mortgage your monthly payment covers the interest and nothing else, so the amount you owe at the end of the term is the same as the amount you borrowed. That makes the monthly cost markedly lower, and it makes the repayment strategy the single most important part of the application. Lenders will not simply take your word for it — they want evidence of a credible plan.
Repayment strategies lenders accept
- Sale of the property, usually only with substantial equity and sometimes a minimum value
- Investments — ISAs, share portfolios, or other savings with evidenced current value
- Pension lump sum, where the timing works against the term
- Sale of another property or asset
- Regular overpayments alongside the interest
Why lenders are cautious
A generation of borrowers reached the end of interest-only terms without a plan, and the regulator paid close attention. The result is stricter criteria: lower maximum loan-to-values, minimum income requirements, and evidence of the repayment vehicle at application and sometimes during the term. It is a legitimate product, but a scrutinised one.
Part and part
A common middle ground is splitting the mortgage — part repayment, part interest-only. The payment sits between the two, and the balance reduces even if it doesn't clear entirely. For many borrowers this is the more realistic answer than a full interest-only arrangement.
Buy-to-let is different
Most buy-to-let mortgages are interest-only as standard, and the criteria are far less restrictive than for residential, because the assessment rests on rental income and the expectation of eventual sale or refinance. If you are looking at a rental property, our buy-to-let page is the more relevant one.