Interest-only mortgages: Are they still a viable option?

As the name suggests, an interest-only mortgage is a product where you only pay off the interest on your mortgage loan. As a result, you will not reduce your loan balance, with the original amount borrowed still outstanding at the end of your term. Seems pretty pointless right?

Despite not paying your capital, interest-only mortgages remain viable options for some. In this blog post, we explore how so you can discover if it is the right choice for you.

How many people have interest-only mortgages?

Interest-only mortgage applications are on a downward spiral in the UK. According to this research from UK Finance, there were 541,000 purely interest-only homeowner mortgages outstanding at the end of 2024 – that’s 18.5% less than in 2023.

The number of partial interest-only mortgages increases this figure by 174,000, which again is lower than in previous years. This decline may have something to do with the disadvantages of interest-only mortgages.

What could going interest-only mean for you?

Like any mortgage type, there are pros and cons to going interest-only. Interest-only mortgages typically mean lower monthly repayments, which is great for short-term cash flow. It is also one of the reasons why they are great options for property investors, including buy-to-let landlords – but more on that later!

With an interest-only product, you’ll still owe the capital at the end of your term, and you’ll need a repayment vehicle to pay off this outstanding balance. This comes in the form of savings, stocks and shares, pensions, investment bonds, unit trusts, endowment policies, and the sale of other properties or assets.

If you don’t have a suitable repayment vehicle, you may have to sell or remortgage your property to make it work in the long-term.

Could an interest-only mortgage work in 2025?

Current market conditions are making interest-only mortgages less favourable and accessible. The Bank of England’s Bank Rate is of course a concern for interest-only applicants, while ongoing economic uncertainty is making fixed repayment mortgages better options.

Stricter affordability checks are also presenting fewer interest-only offers to riskier borrowers, with more documentation needed for those looking to apply for this mortgage type.

Am I a suitable candidate for interest-only?

Interest-only mortgages aren’t for everyone. They work well for homeowners with robust or proven repayment vehicles as well as those who want to prioritise short-term cashflow over long-term financial planning. Interest-only mortgages are also the products of choice for buy-to-let landlords and property investors. Here Property Watchdog explains why:

“A core reason why investors opt for interest only, rather than a repayment mortgage is because it will help boost cashflow each month. For example, a £200,000 mortgage being repaid over 20 years on a repayment mortgage at a rate of 5 per cent will cost £1,320 a month. A £200,000 interest only mortgage on the same basis would cost £834 per month. The obvious drawback of interest-only is that you are not paying down the debt.”

First time buyers, borrowers with uncertain or variable income, those close to retirement, or buyers wanting to move fast with a quick sale or remortgage should generally steer clear of interest-only deals.

Not sure if this mortgage type is right for you?

We’re here to help you find a mortgage type that works for your circumstances. With experience supporting borrowers from all walks of life with a multitude of mortgage products, our experts have the knowledge and guidance to make sense of the market so you don’t have to! Get in touch today to discuss your requirements.