Your home may be repossessed if you do not keep up repayments on a mortgage.
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Most residential mortgages are arranged on a repayment basis, but interest-only mortgages remain an option in certain circumstances. Understanding how they work — and their risks — is important before considering one. Here’s a clear explanation.
How interest-only works
With an interest-only mortgage, your monthly payments cover only the interest on the loan, not the capital you’ve borrowed. This means your monthly payments are lower than on a repayment mortgage — but crucially, at the end of the term you still owe the full amount you originally borrowed. You need a credible plan to repay that capital.
The repayment vehicle
Because the capital isn’t reducing, lenders require evidence of a repayment strategy — a way you’ll clear the balance at the end. This might be savings and investments, another property, or other assets. Lenders scrutinise this carefully, as it’s central to whether an interest-only mortgage is suitable and responsible.
Where interest-only is common
Interest-only is most common in buy to let, where the strategy is often to sell the property or refinance at the end. In the residential market it’s more limited and lenders apply stricter criteria, but it can suit certain borrowers — for example, those with substantial assets or particular income structures.
The FCA does not regulate some forms of Buy to Lets.
The risks to weigh
The main risk is clear: if your repayment plan doesn’t deliver, you could face a shortfall and struggle to repay the capital. It’s essential to have a realistic, well-founded plan and to review it over time. Interest-only is not a way to simply reduce payments without consequence.
Is it right for you?
Whether interest-only is appropriate depends heavily on your circumstances, assets and plans. It’s an area where professional advice is particularly important. With access to a comprehensive range of products from across the market, we can help you understand whether interest-only suits you and which lenders offer it.
