Interest-only mortgages in the UK allow you to make monthly payments that cover only the interest on your loan—none of the principal is repaid until the end of the term. This can make your monthly payments much lower, but it’s important to understand the risks and long-term implications.
Our UK interest-only mortgage calculator helps you instantly see your monthly payments and compare them to repayment mortgages, so you can make an informed decision.
What Is an Interest-Only Mortgage?
An interest-only mortgage is a type of home loan where your monthly payments only cover the interest charged on the amount you borrow. The principal (the original loan amount) remains unchanged throughout the mortgage term. At the end of the term, you must repay the full principal in one lump sum.
- Lower monthly payments: Only interest is paid each month.
- Principal remains: The loan balance doesn’t decrease over time.
- Lump sum at end: You’ll need a plan to repay the full amount at the end of the mortgage.
How Does the Calculator Work?
Our calculator is designed to make it easy to see your monthly payments on an interest-only mortgage. Here’s how it works:
- Enter your loan amount and interest rate.
- Instantly see your monthly interest-only payment.
- Compare with a repayment mortgage to understand the difference in monthly costs and long-term obligations.
The Interest-Only Mortgage Formula
The monthly payment for an interest-only mortgage is calculated using this formula:
Monthly Payment = (Loan Amount × Annual Interest Rate) / 12
Where:
- Loan Amount is the total you borrow
- Annual Interest Rate is expressed as a decimal (e.g., 3% = 0.03)
Example:
If you borrow £100,000 at a 3% interest rate:
Monthly Payment = (£100,000 × 0.03) / 12 = £250
This payment only covers the interest, so your loan balance stays the same until the end of the term.
Example: Monthly Payment on a £100K Interest-Only Mortgage
Let’s break down what you’d pay each month if you borrowed £100,000 on an interest-only basis. The monthly payment is calculated by multiplying the loan amount by the annual interest rate, then dividing by 12. Since you’re not repaying any of the principal, the payment stays the same throughout the term (unless the interest rate changes).
| Loan Amount | 2.00% | 3.00% | 4.00% | 5.00% |
|---|---|---|---|---|
| £100,000 | £166 | £250 | £333 | £416 |
For example, at a 3% interest rate, your monthly payment would be £250. Over a year, you’d pay £3,000 in interest, but your loan balance would still be £100,000 at the end of the year.
How Does This Compare to a Repayment Mortgage?
With a repayment mortgage, your monthly payments would be higher because you’re paying off both the interest and a portion of the principal each month. By the end of the mortgage term, you’d own your home outright. With an interest-only mortgage, you’d still owe the full £100,000 and need a plan to pay it off.
This example highlights why interest-only mortgages can be attractive for those seeking lower monthly payments, but also why it’s crucial to have a clear repayment strategy for the end of the term.
Benefits of an Interest-Only Mortgage
Interest-only mortgages can be appealing for a variety of reasons, especially for those looking to keep their monthly payments low or maximize their cash flow. Here are some of the main advantages to consider:
- Lower initial payments: Makes homeownership more affordable in the short term.
- Flexibility: Can free up cash for other investments or expenses.
- Potential for investment: Some borrowers use the savings to invest elsewhere, aiming for higher returns.
Risks and Considerations
While interest-only mortgages can offer flexibility and lower monthly payments, they also come with unique risks that borrowers should carefully consider. It’s important to understand these potential downsides before deciding if this type of mortgage is right for you:
- No equity built: You don’t reduce your loan balance over time.
- Repayment risk: You must repay the full principal at the end—usually by selling the property, remortgaging, or using savings/investments.
- Higher long-term cost: You may pay more interest overall compared to a repayment mortgage.
- Stricter eligibility: Lenders often require a solid repayment plan and may have stricter criteria.
Interest-Only vs. Repayment Mortgage
| Feature | Interest-Only | Repayment Mortgage |
|---|---|---|
| Monthly Payment | Lower | Higher |
| Principal Paid Monthly | No | Yes |
| Balance at End | Full loan amount | £0 (if all payments made) |
| Total Interest Paid | Higher (usually) | Lower (usually) |
Who Should Consider an Interest-Only Mortgage?
Interest-only mortgages aren’t for everyone, but they can be a useful option in certain situations. They’re best suited to borrowers who have a clear strategy for repaying the principal at the end of the term, and who understand the risks involved. Here are some examples of who might benefit:
- Buy-to-let investors looking to maximize cash flow.
- Borrowers with a clear, reliable plan to repay the principal.
- Those expecting a large future windfall (e.g., inheritance, business sale).
Frequently Asked Questions
What happens at the end of an interest-only mortgage?
You must repay the full loan amount. This is often done by selling the property, remortgaging, or using investments.
Can I switch to a repayment mortgage later?
Yes, many lenders allow you to switch, but your monthly payments will increase.
Are interest-only mortgages harder to get?
Yes, lenders have stricter criteria and will want to see a credible repayment strategy.
Is an interest-only mortgage right for me?
It depends on your financial situation, goals, and risk tolerance. Always seek independent advice before committing.