With an interest-only mortgage your monthly payments only cover the interest on the amount you borrowed. This means it’s important you have a plan for how to pay off the capital (the amount you have borrowed) and understand your options.
How does an interest-only mortgage work?
Mortgage Affordability Calculator
Use our Mortgage Affordability calculator to find out how much you can afford to borrow.
With repayment mortgages you pay off the interest and some of the capital each month, so that the mortgage will be cleared at the end of the term.
With interest-only mortgages, you only pay off the interest on the amount you borrow.
You use savings, investments or other assets you have (known as ‘repayment plans’) to pay off the total amount borrowed at the end of your mortgage term.
Example
If you have a £100,000 interest-only mortgage for 25 years, you’ll pay the interest on the amount you borrowed each month.
When the 25 years are up, you’ll have to repay the full £100,000.
Your repayment plan
Work out a repayment plan
Use our Savings calculator to work out the monthly amount you’ll need to put away to clear your mortgage at the end of the term.
You must be able to show the lender how you’ll repay the mortgage at the end of the term.
You, not the lender, are responsible for putting in place and maintaining a credible repayment plan to repay the original loan.
You can’t rely on the promise of a future windfall such as an inheritance or bonus.
You also can’t speculate that property prices will rise enough to allow you to buy a smaller home and still pay off the mortgage.
The lender will check at least once during your mortgage term that your repayment plan is on track to cover your mortgage.
Repayment plans
Examples of repayment vehicles include:
- cash saved in a savings account or ISA (although some lenders are no longer accepting this as a repayment vehicle)
- stocks and shares ISA
- pensions
- investment bonds
- shares
- unit trusts
- regular savings plans (endowment policies)
- other properties or assets.
Your lender will take a view about whether your chosen repayment plan looks likely to pay off the capital at the end of the mortgage.
Unless you understand how an investment works, it’s best to speak to a financial adviser. Find out more in our guide Do you need a financial adviser?
Work out how much you need to save
You need to put in the mortgage amount and the length of time you have until it ends.
Then add in different rates of interest or growth you can expect on average over the term.
Pick a low and a high figure (2%-5%) to see the worst and best result.
Important
The value of investments can rise and fall and it’s possible that you could lose all of your money before you’re able to pay off your mortgage.
It’s important to review your investments regularly.
Ideally, you’d want to be able to switch into much safer cash-based products as the term of your mortgage gets closer.
That way you’ll have the peace of mind that you’ve got enough to cover your mortgage. Speak to a financial adviser about the best investment plan for you.
Already have an interest-only mortgage?
If you have an interest-only mortgage
Review your repayment plan regularly to make sure it’s on track. If you don’t have one in place, act now and contact your lender to explore your options, for example, switching to a repayment mortgage.
If you have more than 50% equity in your property and a repayment plan that’s on track and accepted by a range of lenders, then you should be okay.
If you don’t, you might find it difficult to remortgage when your existing deal comes to an end.
Review your repayment scheme
It’s essential you review your investment plan regularly and take action if you think it won’t provide sufficient funds to pay off your mortgage.
Talk to your lender or get professional financial advice.
- Contact your product provider, fund manager or financial adviser and ask if your investments are on track to repay your mortgage.
- Add up any separate savings beyond your repayment plan investments and see if you can release any of this money to reduce the loan if your lender will allow.
- Call your lender and ask about overpayments or switching to part repayment and part interest only. Check whether you’ll be charged any fees.
- If you’re worried that you won’t be able to repay the mortgage, contact your lender and explain the situation. If you can’t work out a solution with your lender, get free advice.
Find out more in our guides:
Mortgage arrears or problems paying your mortgage
Help if you're struggling with debt
Re-mortgaging
Where you want to remortgage to another lender, your new lender is likely to want to make sure that you can afford the loan and to put your repayment plan under scrutiny.
This means that people with interest-only mortgages might find it difficult to get another mortgage.
Your existing lender is allowed to offer you a new deal (known as a Product Transfer – ie switch to another interest rate deal) without an affordability assessment as long as it does not involve increasing the amount you borrow (other than any fees for switching).
