What Is an Interest Only Mortgage? A Complete UK Guide for 2025/26
An interest-only mortgage is a home loan where your monthly repayments cover only the interest charged on the borrowed capital — not the capital itself. At the end of the mortgage term, you still owe the full amount you originally borrowed, known as the balloon payment. This must be repaid in full on the final day of the mortgage.
For example, if you borrow £200,000 on an interest-only basis at 4.5% over 25 years, your monthly payment is just £750 (£200,000 × 4.5% ÷ 12). After 25 years, you have paid £225,000 in interest and still owe £200,000. A repayment mortgage at the same rate would cost £1,111/month but leaves you with no debt at the end.
Who Can Get an Interest-Only Mortgage in the UK?
Since the Financial Conduct Authority's Mortgage Market Review (MMR) in 2014, residential interest-only mortgages have become significantly harder to obtain. Lenders must now ensure borrowers have a credible repayment vehicle — a concrete plan for how they will repay the capital at the end of the term.
Accepted repayment vehicles typically include:
- Stocks and shares ISA — a portfolio of investments expected to grow to cover the balloon payment
- Endowment policy — a with-profits or unit-linked life insurance policy (though new endowments are rare today)
- Property sale or downsizing — selling the home and using equity to repay; requires substantial equity
- Pension lump sum — using part of a pension tax-free lump sum at retirement
- Other assets — shares, investment bonds, other property equity
Most residential lenders also impose additional criteria: minimum property values (often £300,000–£500,000), maximum LTV limits (typically 50–75%), and minimum income thresholds. Lenders including Nationwide, Barclays and Halifax all offer residential interest-only but with strict eligibility requirements.
Interest Only for Buy-to-Let Mortgages
Buy-to-let mortgages are a very different story. The majority of landlords choose interest-only for their investment properties, and lenders actively promote it. The reason is simple: lower monthly payments mean the rental income is more likely to exceed the mortgage payment, keeping the property cash-flow positive.
For buy-to-let, lenders assess affordability based on rental income rather than the borrower's personal income, using a rental stress test: typically, the monthly rent must be 125% to 145% of the monthly interest payment (depending on the lender and the borrower's tax band). LTV limits are usually 75–80% for buy-to-let, though some specialist lenders go up to 85%.
At the end of a buy-to-let interest-only mortgage, landlords typically either sell the property, remortgage, or use accumulated rental income savings to repay the capital.
The Endowment Scandal: A Warning from History
The widespread use of endowment mortgages in the 1980s and 1990s led to one of the biggest mis-selling scandals in UK financial history. Millions of homeowners were sold endowment policies — investment policies linked to stock markets — as repayment vehicles for interest-only mortgages. They were promised the policy would grow enough to repay their mortgage and leave a surplus.
When stock markets underperformed expectations and charges ate into returns, millions of policies fell short. By the 2000s, over 5 million households received red warning letters stating their endowment was projected to fall short of their mortgage balance. Billions of pounds in compensation were paid out. This scandal is a stark reminder of the risk of relying on investment performance to repay a mortgage.
Switching from Interest-Only to Repayment
Many borrowers who took out interest-only mortgages — particularly in the 2000s — are now approaching the end of their term with inadequate repayment vehicles. The good news is that switching to a repayment mortgage is usually possible, though it will increase your monthly payment. Options include:
- Full switch to repayment — convert the entire mortgage to a repayment basis. Monthly payments increase but the capital reduces each month.
- Partial switch — convert part of the mortgage to repayment. Balances both cash flow and capital repayment.
- Extend the term — if you switch to repayment but need to keep payments manageable, extending the mortgage term reduces monthly costs.
- Make lump sum payments — reduce the capital on your interest-only mortgage through regular or one-off overpayments (check ERC terms).
If you are on an interest-only mortgage and your repayment vehicle is not on track, you should speak to a qualified mortgage adviser immediately — the earlier you act, the more options are available.
Interest-Only vs Repayment: Total Cost Comparison
To illustrate the difference over a full 25-year term on a £200,000 mortgage at 4.5%:
| Feature | Interest Only | Repayment |
|---|---|---|
| Monthly payment | £750 | £1,111 |
| Monthly saving | +£361 | — |
| Total paid over 25 years | £225,000 + £200,000 balloon = £425,000 | £333,300 |
| Total interest paid | £225,000 | £133,300 |
| Capital owed at end | £200,000 | £0 |
| Extra cost vs repayment | +£91,700 | — |
The table clearly shows that while interest-only is cheaper month-to-month, it costs dramatically more over the full term. However, if the monthly saving is invested consistently in a growth ISA at 5% per annum, the ISA pot would reach approximately £205,000 after 25 years — roughly enough to cover the balloon payment. This is the theory behind using an ISA as a repayment vehicle.
Partial Capital Repayment Options
Some lenders offer part-and-part mortgages — where part of the borrowing is on a repayment basis and part is interest-only. For example, a £200,000 mortgage could be split: £100,000 on repayment and £100,000 interest-only. This reduces the balloon payment at the end while keeping monthly payments below a full repayment mortgage.
Interest-Only for Older Borrowers: Equity Release vs Retirement Interest-Only
A specialist type of interest-only mortgage — the Retirement Interest-Only (RIO) mortgage — has gained popularity since the FCA introduced regulations in 2018. Unlike standard mortgages, RIO mortgages have no fixed end date. Repayment is triggered by the sale of the property, typically when the borrower moves into care or passes away. Several mainstream lenders and building societies now offer RIO products, providing an alternative to equity release for asset-rich, income-poor retired homeowners.
Lender Criteria Comparison: Nationwide, Barclays and Halifax
Nationwide Building Society offers residential interest-only mortgages to borrowers with a minimum property value of £300,000, maximum LTV of 50%, and minimum gross income of £75,000. Accepted repayment vehicles include ISAs, stocks and shares portfolios, and sale of a second property.
Barclays offers residential interest-only up to 75% LTV for borrowers with assets or confirmed repayment vehicles. For buy-to-let, Barclays offers interest-only up to 75% LTV with standard rental stress testing.
Halifax (part of Lloyds Banking Group) allows interest-only residential mortgages up to 75% LTV with a credible repayment plan. Halifax also offers partial interest-only (part-and-part) products.
All three review the repayment vehicle at application and may periodically check whether it remains on track, particularly if the mortgage is nearing maturity.