Interest-Only Mortgages Explained
Discover how interest-only mortgages work, why they are the standard choice for landlords, and what you need to know about repaying the capital.
Speak to an AdvisorHow Do Interest-Only Mortgages Work?
Unlike a standard repayment mortgage where your monthly payments chip away at both the loan amount and the interest, an interest-only mortgage works differently. Your monthly payments only cover the interest charged on the loan.
This means your monthly payments will be significantly lower. However, because you are not paying back any of the actual loan (the capital), the original amount you borrowed will still be owed in full at the end of the mortgage term.
Crucial point: You must have a credible plan in place to pay off the massive lump sum at the end of the term. Lenders call this a "repayment vehicle."
Why are they popular for Buy-to-Let?
While interest-only mortgages are very rare for standard residential homebuyers today, they are the industry standard for Buy-to-Let (BTL) investors.
Maximized Cash Flow
Lower monthly mortgage payments mean the landlord keeps more of the monthly rental income as profit, protecting against void periods.
Capital Growth Strategy
Landlords often rely on the property increasing in value over time. They sell the property at the end of the term, pay off the original loan, and keep the capital growth as profit.
Acceptable Repayment Vehicles
Lenders will rigorously check your plan to repay the capital. Acceptable repayment vehicles usually include:
- Sale of the mortgaged property (standard for Buy-to-Let)
- Sale of other properties or assets
- Savings and investment portfolios (Stocks & Shares ISAs, Unit Trusts)
- Pension lump sums
Need Buy-to-Let Advice?
Our brokers are experts in the Buy-to-Let market and can help you secure the best interest-only rates for your investment property.
Get Expert AdvicePros & Cons
Pros
- Lower monthly payments
- Better cash flow for landlords
- Flexibility to make overpayments (usually up to 10%)
Cons
- You don't build equity through payments
- You pay more interest overall
- Risk of property value falling (negative equity)