Mortgages and Property

What Is Interest-Only Mortgage?

A mortgage where monthly payments cover only the interest charge; the capital borrowed must be repaid separately at the end of the term.

Definition

With an interest-only mortgage, your monthly payment covers just the interest on the loan. The original capital remains outstanding throughout the term and must be repaid in full at the end, typically from savings, investments or sale of the property. Monthly payments are significantly lower than a repayment mortgage of the same amount and rate, which can help with affordability. However, you build no equity through your payments. Most residential lenders now require a credible repayment vehicle (ISA, pension, investment portfolio, or confirmed sale plan) before approving an interest-only mortgage. Buy-to-let mortgages are commonly structured as interest-only, with the loan repaid from the eventual property sale.

Formula

Monthly payment = (Loan amount x annual rate) / 12

Example

A £200,000 interest-only mortgage at 5% costs £200,000 x 5% / 12 = £833 per month. After 25 years you still owe £200,000.

Use It

Try the UK Mortgage Calculator

Related Terms

Buy-to-Let MortgageA mortgage designed for properties purchased as rental investments, with different lending criteria and typically higher rates than residential mortgages.Fixed-Rate MortgageA mortgage where the interest rate is locked for an initial period (commonly 2, 3 or 5 years) regardless of Bank of England base rate changes.Loan-to-Value (LTV)The ratio of your mortgage amount to the property value, expressed as a percentage. Lower LTV usually means better mortgage rates.
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