Glossary · UK
What is Interest-Only Mortgage?
A mortgage where monthly payments cover only the interest charged, leaving the full original loan amount still owed at the end of the term unless a separate repayment plan clears it.
Full Definition
With an interest-only mortgage, the borrower's monthly payment covers just the interest the lender charges on the loan, so the capital balance never reduces on its own -- at the end of the mortgage term the borrower still owes exactly the amount originally borrowed and must repay it in full, typically by selling the property, using an investment or savings vehicle built up alongside the mortgage, downsizing, or remortgaging. Because none of the payment goes toward capital, monthly payments on an interest-only mortgage are noticeably lower than on an equivalent repayment mortgage, which is why the structure is the default choice for most buy-to-let mortgages (where the eventual sale of the property, or refinancing, is treated as the repayment strategy) but is now tightly restricted for residential owner-occupier mortgages. Since the 2014 Mortgage Market Review, UK lenders must stress-test that a residential interest-only borrower has a credible and evidenced repayment vehicle in place -- vague plans such as "hoping house prices rise" are not accepted -- and many lenders cap the loan-to-value available on interest-only lending at 50 to 75%. Retirement Interest-Only mortgages and lifetime mortgages are specialist variants aimed at older borrowers where the loan is typically repaid from the sale of the property on death or move into long-term care rather than during the borrower's lifetime.