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Interest-only mortgages haven’t disappeared entirely, but they are less common than they once were.
While they were once the standard option, especially during the 80s and 90s, today’s criteria are stricter and lenders will want to know exactly how you plan to repay the mortgage at the end of the term.
These mortgages allow you to pay only the interest each month, meaning your balance doesn’t reduce over time.
When the mortgage ends, you’ll still owe the full amount, so the lender needs to be confident in your repayment strategy from day one.
Interest-Only Mortgages
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What Repayment Plans Do Lenders Accept?
The repayment strategy is what separates interest-only from other types of mortgages.
You’re not reducing the balance each month, so the lender needs clear evidence that you’ll be able to repay the capital in full later on.
That could be through:
- Selling the property
- Selling another property
- A pension lump sum or investment
- Receiving an inheritance
- Downsizing to a smaller home
Each lender will have their own rules on what they’ll accept, and not every plan will suit every situation. If your strategy isn’t clear or realistic, the mortgage is unlikely to be approved.
When Could an Interest Only Mortgage Make Sense?
There are still situations where interest-only mortgages can work well.
Landlords often prefer them on buy-to-let properties to keep their monthly payments lower, repaying the balance when the property is eventually sold.
Some older homeowners consider retirement interest-only mortgages, using equity in the home to fund their plans and settling the loan when the property is sold or they move into care.
In less common cases, a borrower may have a clear future lump sum available, such as from inheritance or the sale of another asset, which they intend to use to repay the mortgage when the time comes.
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Why Did Interest Only Mortgages Fall Out of Favour?
Back in the day, many borrowers relied on endowment policies or investment plans to repay their mortgages.
These didn’t always perform as expected, and shortfalls left some people unable to reply their loans. That led to widespread concerns around mis-selling and tighter rules being introduced.
Lenders are now more cautious. They’ll want to see proof that your repayment strategy is sound, and they’ll usually limit how much you can borrow compared to the property’s value.
You may also need to have a high income or significant equity in the home to be considered.
Do You Need a Large Deposit?
For residential interest-only mortgages, you’ll usually need a deposit of at least 50%, though some lenders may consider lower deposits depending on the repayment plan and your income.
If you’re looking at age 50+ mortgages or equity release, the deposit requirement could vary depending on your age, income and property value.
Buy-to-let interest-only mortgages tend to follow different rules. While you’ll typically need at least a 25% deposit, the focus is more on the rental income than your personal earnings.
What Are the Risks?
The biggest risk with an interest-only mortgage is that you could reach the end of your term without a way to repay the balance.
If your repayment plan falls through or doesn’t generate the funds you expected, you may be forced to sell your home.
It’s vital to be realistic about your repayment strategy and speak to a mortgage advisor early on. This kind of mortgage isn’t for everyone, but when used in the right way, it can be a practical solution.
How UK Moneyman Can Help
Interest-only mortgages is a niche area, but we’ve helped many homeowners and landlords explore their options.
Whether you’re thinking about downsizing in the future, managing multiple properties, or approaching retirement with a specific repayment plan in mind, we’ll let you know if this route could work for you.
Speak to our team and we’ll help you understand what lenders are looking for, how your situation stacks up, and whether an interest-only mortgage is realistic for your plans.
