Introduction.
With an interest-only mortgage you pay the interest each month and repay the loan itself at the end, from a plan agreed at the start.
Interest-only lending is more tightly controlled than it once was, but it is very much available to the right borrowers. Lenders simply need to see a believable way of repaying the loan.
Used well, it frees up monthly cash for people whose wealth arrives in lumps: bonuses, share vesting, business sales or investments. Used carelessly, it leaves a large debt with no plan to clear it.
This guide explains how interest-only and part-and-part mortgages work, which repayment strategies lenders accept, what they really cost, and who they suit.
Monthly interest on a £500,000 interest-only loan at 4.5%, against £2,779 on repayment over 25 years.
01How interest-only works.
Each monthly payment covers only the interest. The amount you borrowed stays the same until you repay it, usually at the end of the term.
| £500,000 over 25 years at 4.5% | Monthly | Owed at the end |
|---|---|---|
| Repayment | £2,779 | £0 |
| Interest-only | £1,875 | £500,000 |
| Part-and-part, 50/50 | £2,327 | £250,000 |
Illustrative only. Rates and payments will vary.
Part-and-part
Part of the loan is on repayment and part is interest-only. It lowers payments while still clearing some of the debt, and some lenders accept a smaller repayment plan for the interest-only part.
Adviser’s note
Interest-only is a cash-flow tool, not a cheaper mortgage. Over the full term you pay more interest, because the balance never falls.
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- 02Repayment strategies lenders accept
- 03Who it suits
- 04Lender rules to expect
- 05The true cost over time
- 06Switching and reviewing
- 07Interest-only, illustrated
- 08Checklist and glossary
02Repayment strategies lenders accept.
Every interest-only mortgage needs a credible plan to repay the loan, and the lender will check it at the start and during the term.
| Strategy | What lenders usually look for |
|---|---|
| Sale of the property | Substantial equity, often with higher thresholds in London |
| Investments and ISAs | Current value and a realistic projection |
| Pension lump sum | Projected tax-free cash and your age |
| Other property | Equity in property you own, net of debt |
| Bonuses and share vesting | A track record, often used to reduce the loan |
| Sale of a business | Considered case by case |
Indicative only. Criteria vary by lender.
Strategies that do not count
- Hoped-for inheritance. Lenders will not rely on money you do not yet have.
- Future house price growth. Your plan must work on today’s values.
- “I will remortgage later.” Refinancing is not a repayment strategy.
03Who it suits.
Interest-only works best where income or wealth is real but arrives irregularly, or where the borrower has a clear exit.
- Bonus and share earners. Lower monthly payments, with lump sums used to cut the balance.
- Business owners. Keeping cash in the business, with a sale or dividends as the plan.
- High-net-worth clients. Borrowing against property while investments grow elsewhere.
- Downsizers. A planned sale of a large home in later years.
- Landlords. Buy-to-let mortgages are usually interest-only, repaid from rent and sale.
Who it rarely suits
Borrowers with no savings or investments, small deposits or a plan that depends on things going well. In those cases repayment, or part-and-part, is safer.
Overpaying
Most lenders allow overpayments, often up to 10% a year without charge, so you can reduce the loan whenever a lump sum arrives.
04Lender rules to expect.
Lenders manage interest-only risk through deposits, incomes and the strength of your plan.
| Point | Typical approach |
|---|---|
| Maximum loan to value | Often 50% to 75%, lower than on repayment |
| Minimum income | Some lenders set one, particularly for sale-of-property plans |
| Minimum equity | Required where the property sale is the plan |
| Affordability | Usually tested as if on repayment |
| Term | Must end by the time your plan delivers |
Indicative only. Private banks may lend more flexibly.
Private banks
For larger loans and wealthier clients, private banks can be more flexible on interest-only, especially where you hold investments with them. We compare them with mainstream lenders.
Lenders are required to check during the term that your plan is still on track, so expect to be contacted for an update.
05The true cost over time.
Lower payments come at a price. Over a full term, interest-only costs considerably more in total interest.
| £500,000 at 4.5% | Total interest | Loan cleared |
|---|---|---|
| Repayment, 25 years | £333,700 | Yes |
| Interest-only, 25 years | £562,500 | No |
| Interest-only, overpaying £20,000 a year | Far lower | Largely |
Illustrative only, assuming the rate stays the same throughout.
Adviser’s note
Many clients take interest-only for flexibility, then overpay regularly. You get lower required payments and still reduce the debt.
06Switching and reviewing.
Your plan should be reviewed as life changes. Switching between interest-only and repayment is often possible.
- Interest-only to repayment. Usually straightforward if you can afford the higher payment.
- Repayment to interest-only. Needs a lender to approve a new repayment plan.
- Part-and-part changes. The split can often be adjusted at a new deal.
- Annual review. We check your plan’s value against the balance each year.
Shortfall risk
If your repayment plan falls short, you may have to sell, extend the term or switch to repayment at a higher cost. Reviewing early keeps all of these options open.
Protection matters too. Life cover sized to the full loan ensures it can be repaid if the worst happens.
07Interest-only, illustrated.
A banker with a large annual bonus
Buying a £1.5 million family home with a £500,000 deposit, with salary plus a significant bonus and deferred shares.
- Loan
- £1,000,000, two-thirds of the price
- Structure
- Part-and-part: £600,000 repayment, £400,000 interest-only
- Repayment plan
- Annual bonus and vesting shares, with an investment portfolio as backup
- Overpayments
- Planned each spring, within the 10% allowance
- Outcome
- Lower monthly commitment, with the interest-only part on course to clear within about ten years
This example is illustrative and does not describe a real client.
08Checklist and glossary.
Documents to have ready
- Proof of income, including bonus history
- Statements for investments, ISAs and pensions
- A pension projection, if using pension cash
- Details and valuations of other property
- Share scheme statements and vesting schedules
- Your current mortgage statement
- Bank statements for the last three months
- Details of your existing protection
Glossary
- Interest-only
- You pay interest only; the loan is repaid at the end.
- Repayment
- Payments cover interest and part of the loan.
- Part-and-part
- A mix of repayment and interest-only.
- Repayment vehicle
- The plan used to repay an interest-only loan.
- Overpayment
- Paying more than required to cut the balance.
- LTV
- Loan to value: the loan as a percentage of the value.
- Term
- The length of the mortgage.
- Private bank
- A bank lending to wealthier clients on bespoke terms.
Related: Large loan advice · Private Client Guide · All guides