Interest-Only Mortgage Calculator UK 2026

How Interest-Only Mortgages Work in the UK

An interest-only mortgage is a home loan where your monthly repayments cover only the interest charged on the outstanding loan balance. Unlike a repayment mortgage — where each payment gradually reduces both the interest and the capital — an interest-only mortgage leaves the original loan amount entirely intact throughout the term. At the end of the mortgage period, you must repay the full capital sum borrowed, either through a dedicated savings plan, pension, or sale of the property.

The appeal is straightforward: monthly payments are substantially lower. On a £250,000 mortgage at 4.5% interest, an interest-only borrower pays approximately £938 per month. The equivalent repayment mortgage over 25 years would cost around £1,390 per month — a difference of over £450 per month, or £5,400 per year. This freed-up cash flow is why interest-only mortgages remain popular with buy-to-let landlords and certain owner-occupiers with sophisticated financial plans.

However, the lower monthly cost comes with a significant trade-off. Because you never reduce the principal, you pay interest on the full loan amount for the entire term. On that same £250,000 at 4.5%, total interest on an interest-only basis over 25 years is £281,250 — compared to approximately £167,000 on a repayment mortgage. The interest-only borrower pays roughly £114,000 more in interest alone, and still faces a £250,000 capital repayment bill at the end. The total cost of an interest-only mortgage is therefore considerably higher than a repayment equivalent when viewed over the full term.

Who Qualifies for Interest-Only Mortgages

Since the Financial Conduct Authority (FCA) introduced sweeping reforms through the Mortgage Market Review (MMR) in 2014, eligibility for interest-only mortgages has become considerably more restrictive. Lenders must be satisfied not only that you can afford the monthly interest payments, but also that you have a credible and evidenced plan to repay the capital at the end of the term.

Typical eligibility requirements for residential interest-only mortgages in 2026 include a maximum loan-to-value of 75% (requiring a 25% deposit or equity), a minimum property value — often £300,000 or more — and a minimum income threshold that many lenders set at £75,000 or above for single applicants. Lenders also scrutinise your repayment strategy in detail. Vague plans to "sell the house" are no longer accepted. You must demonstrate specific, credible repayment vehicles that are on track to meet the required amount.

Income requirements tend to be more stringent than for repayment mortgages because lenders factor in the risk that the repayment vehicle may underperform. Borrowers with complex incomes — contractors, the self-employed, business owners — may find interest-only harder to obtain than salaried employees, even if their overall wealth is substantial. High-street lenders including NatWest, Santander, Nationwide, and Halifax all offer interest-only products under strict criteria, while specialist and private banks may accommodate a wider range of borrower profiles.

Repayment Vehicle Requirements

The repayment vehicle is the mechanism you intend to use to repay the capital at the end of the interest-only term. This is not a secondary consideration — for most lenders, the quality and credibility of your repayment vehicle is the primary determinant of whether you will be approved. Lenders typically review repayment vehicles at regular intervals during the mortgage term and may require you to switch to repayment if your plan falls behind projections.

The most commonly accepted repayment vehicles are: Individual Savings Accounts (ISAs), which allow tax-free growth on up to £20,000 per year; pension lump sums, where up to 25% of your pension pot can be taken tax-free from age 55 (rising to 57 in 2028); endowment policies, which are now very rare but exist among older borrowers who took them out before the 1990s mis-selling scandal; and proceeds from the sale of a second property, investment portfolio, or business. Some lenders also accept a downsizing strategy for older borrowers, where the equity generated by selling the family home and moving to a smaller property will comfortably clear the mortgage balance.

Risks and FCA Regulations Around Interest-Only

The FCA has long expressed concern about the risks that interest-only mortgages pose to borrowers, particularly those who have no clear or credible repayment strategy. The regulator has referred to the maturing of large numbers of interest-only mortgages taken out in the 1990s and early 2000s as a "ticking time bomb," with many borrowers reaching the end of their terms without sufficient funds to repay the capital.

Key risks include: underperformance of the repayment vehicle, particularly endowment policies that paid out far less than projected in the late 1990s and 2000s; property value falls that reduce equity to the point where selling cannot clear the mortgage; and borrower circumstances changing — redundancy, divorce, illness — that prevent them from maintaining the savings plan. The FCA requires lenders to write to all interest-only customers at specified points during the term to confirm their repayment strategy is on track, and encourages early switching to repayment where there are concerns.

Interest-Only vs Repayment: Full Comparison

Choosing between interest-only and repayment fundamentally comes down to your financial priorities, cash flow needs, and confidence in your repayment strategy. Neither product is universally better — the right choice depends entirely on your individual circumstances.

Interest-only mortgages offer lower monthly payments, freeing up cash for other investments or living costs. They provide flexibility and can make sense where borrowers have strong, well-managed repayment vehicles growing faster than the mortgage interest rate — for example, a pension fund generating 7-8% annual returns against a 4.5% mortgage rate. They are also simpler from a cash flow perspective for buy-to-let landlords, where rental income needs to service the mortgage comfortably to meet lender stress tests.

Repayment mortgages offer certainty: pay every month for the agreed term and the mortgage is cleared. There is no end-of-term capital repayment risk. Each payment builds equity, reducing the outstanding balance and increasing your ownership stake in the property. The total interest cost is lower because the outstanding balance decreases month by month. For most residential owner-occupiers, particularly first-time buyers and those without sophisticated investment strategies, repayment remains the sensible default.

A hybrid approach — a part-and-part mortgage — allows you to take part of the loan on interest-only and the rest on repayment. This reduces monthly payments while ensuring some capital is repaid, reducing the end-of-term lump sum required. Many lenders offer this flexibility, and it can be a pragmatic middle ground for borrowers who want lower monthly costs but are uncomfortable with a full interest-only arrangement.

Interest-Only Mortgages for Buy-to-Let Landlords

Interest-only is the overwhelmingly dominant mortgage type in the buy-to-let market. The vast majority of buy-to-let mortgage products are structured on an interest-only basis, and for good reason. For a property investor, the primary concern is maximising rental yield and cash flow, not building equity through capital repayment. The monthly rental income needs to cover the mortgage payment with a comfortable margin — typically lenders require rent to cover 125-145% of the interest-only payment — and any surplus represents profit.

A buy-to-let investor purchasing a £200,000 property with a 25% deposit (£50,000 down, £150,000 mortgage) at 5% on an interest-only basis would pay £625 per month. If the property rents for £950 per month, the monthly surplus is £325 before maintenance, letting agent fees, and voids. The same mortgage on a repayment basis over 25 years would cost approximately £878 per month, generating a much smaller monthly surplus and potentially failing lenders' rental coverage stress tests.

For buy-to-let, the typical repayment strategy is the sale of the property at the end of the term, using the capital gain to clear the loan and — ideally — generate a profit. This is a widely accepted repayment vehicle for investment property mortgages, though lenders still require evidence that the property value is likely to exceed the mortgage balance comfortably. Portfolio landlords — those with four or more mortgaged properties — face additional underwriting scrutiny under PRA rules introduced in 2017 and must demonstrate portfolio-level affordability as well as property-level coverage.

Frequently Asked Questions