Head of Content
Mortgage Advisor & Director
Interest-only mortgages are the main alternative to capital repayment mortgages, but what are they and how do you get one? Find the answers here…
What is an interest-only mortgage?
An interest-only mortgage is a mortgage where the borrower only has to pay the interest charges each month. The capital debt does not need to be repaid until the end of the term.
The ‘interest-only’ element of the mortgage refers to its ‘repayment type’, with the main alternative being capital repayment, which involves repaying a portion of the capital debt plus interest each month. Interest-only mortgages are less common than capital repayment agreements in the residential market, but are popular among buy-to-let landlords.
Interest-only mortgages were more prevalent before the 2008 financial crisis, after which it emerged that many were mis-sold. Today, however, lenders have more stringent criteria for them and the reputation of these arrangements has improved significantly.
How do they work?
If you were to take out an interest-only mortgage, you would only need to pay the interest costs each month, rather than a portion of the debt plus interest, as with capital repayment.
This means that your monthly mortgage payments will be lower compared to someone who is borrowing the same amount on a capital repayment basis, but at the end of the term, you will still have the debt itself to pay off. This needs to be settled by a ‘repayment vehicle’.
Repayment vehicles can include bonds, ISAs or the sale of the property. Repayment vehicles must be approved by the lender in advance.
Eligibility criteria
The criteria for residential interest-only mortgages is more stringent than for capital repayment as lenders consider them high risk. Many have higher deposit and minimum income requirements. You can find a breakdown of the full criteria below:
- Repayment vehicle: You won’t get approved for an interest-only mortgage without proof of a repayment vehicle. See the subsection below for a list of acceptable ones.
- Deposit requirements: The minimum amount of deposit you will need is 15% of the property’s value (85% LTV), but some lenders will request more than this.
- Income requirements: Some lenders have a minimum income requirement of £25-30k for interest-only mortgages, while others may ask for more.
- Age restrictions: Can be somewhat more stringent for this repayment type, with some providers not lending to anyone who will be 75 at any point during the mortgage term. Others have higher age caps, and a few, none at all.
- Other factors: It can be more difficult to get approved for an interest-only mortgage with bad credit, if you are newly self-employed or are buying a non-standard construction property. Speak to a mortgage broker if these risk factors apply.
Acceptable repayment vehicles
Some repayment vehicles are more widely accepted than others. The table below shows the approximate number of lenders you would have access to with each type:
|
Repayment Vehicle |
Approx. Number of Available Lenders |
|
Existing endowment or ISA |
63 |
|
Pension lump sum |
60 |
|
Sale of the mortgaged property |
63 |
|
Sale of another property (mortgaged) |
60 |
|
Sale of another property (unencumbered) |
63 |
|
Other assets |
33 |
Compare interest-only mortgage rates
Interest rates on interest-only residential mortgages are no different to capital repayment mortgages. In fact, many lenders offer a choice between the ‘interest-only’ and ‘capital repayment’ repayment type on the same products for borrowers who fit the criteria for both.
However, since the criteria is stricter for interest-only, the best rates on the market can be more difficult to come by, due to borrowers having fewer products to choose from.
You can compare the latest interest-only mortgage rates for free on Teito and get advice from a broker who specialises in them as part of the service. Get started below:
Compare interest-only mortgage deals for FREE
Interest-only mortgage calculator
You can use our interest-only mortgage calculator below to get an idea of how much your monthly payments will cost. This tool gives you the option to compare different interest rates and term lengths, and convert the results to capital repayment for comparison purposes.
Example calculations
The table below shows how the monthly payments will look on interest-only mortgages of common amounts in increments of £100,000. For these calculations, we used an interest rate of 4.5% and a term length of 25 years, which is standard for the UK market.
|
Mortgage Amount |
Interest Rate |
Term Length |
Monthly Payment |
Overall Cost |
|
4.5% |
25 years |
£375 |
£212,500 |
|
|
4.5% |
25 years |
£750 |
£425,000 |
|
|
4.5% |
25 years |
£1,125 |
£637,500 |
|
|
4.5% |
25 years |
£1,500 |
£850,000 |
|
|
4.5% |
25 years |
£1,875 |
£1,062,500 |
Which lenders offer interest-only mortgages?
Several mortgage lenders, including Bluestone and Bank of Ireland, do not offer interest-only mortgages but most other providers in the UK do, as long as you have a repayment vehicle.
Below are examples of the lenders available, along with some of their specific requirements:
- NatWest: Offers interest-only but borrowers must have income of at least £75k.
- Barclays: Has a minimum equity requirement of £300k if the repayment vehicle is the sale of the property the mortgage is secured against.
- HSBC: Offers interest-only and has no minimum equity requirement.
- Accord Mortgages: Has a maximum age limit of 80-years-old (by the end of the agreement) for interest-only mortgages.
There is a wide range of lenders available for interest-only mortgages, but their criteria can vary dramatically - speak to a broker to find out which one is the best fit for you.
Pros and cons
The table below shows the advantages and disadvantages of interest-only mortgages at a glance, to help you decide whether this repayment type is right for you:
|
Advantages |
Disadvantages |
|
Monthly payments are lower |
You will pay more for your mortgage overall as interest is based on the outstanding loan amount, which does not diminish |
|
Some lenders offer the option to switch to interest-only temporarily |
Can be riskier as repayment vehicles can fail to pay out |
|
More disposable income means you have freedom to invest it elsewhere |
Criteria can be more stringent |
|
A viable option for investment mortgages |
Less product choice available |
Unsure whether a capital repayment is a better alternative? See our interest-only vs. capital repayment mortgage guide for insight on this
Switching to or from interest-only
Homeowners can switch from a capital repayment mortgage to interest-only and it's sometimes possible to do so without going through the full remortgage process.
You might, however, need to remortgage if your current lender doesn't offer interest-only as a repayment type or you don't meet their criteria to switch.
To change your mortgage to interest-only, you will need to evidence your repayment vehicle and have the lender approve it before the switch goes through.
Switching from interest-only to capital repayment can be more straightforward since you don’t need a repayment vehicle, though your mortgage lender is likely to place scrutiny on your affordability to make sure you can manage the higher monthly payments.
Finally, it is sometimes possible to switch to interest-only on a temporary basis if you are struggling to pay your mortgage, but this would be done at the lender’s discretion.
Why choose Teito for your mortgage needs?
You can compare the latest interest-only mortgage rates for free on Teito, choose the one you want in real-time and get expert advice from our team of mortgage brokers.
Here are just some of the reasons people choose us for their mortgage needs:
- You can access the latest interest-only mortgage deals in seconds
- Our brokers specialise in interest-only mortgages
- We are 5-star rated on leading review services
- You can secure an agreement in principle in minutes
Ready to compare rates for free and take advantage of a free, no-obligation chat with a broker who specialises in interest-only mortgages? Get started here.
FAQs
While capital repayment mortgages can span a much longer period, most lenders will only allow you to take out an interest-only mortgage for up to 25 years.
At the other end of the spectrum, the shortest term available is usually five years.
Choosing an Adviser
Selecting a qualified and experienced mortgage adviser is of great importance. To choose a suitable adviser, evaluate their qualifications, experience, and reputation, and ensure they are regulated by the Financial Conduct Authority (FCA).
Read reviews from previous clients and make sure they provide a clear explanation of the products and services they offer, as well as the fees and charges associated with them.