Finance glossary
Interest-Only Mortgage
In simple terms
With an interest-only mortgage your monthly payment only covers the interest, not the amount you borrowed. The balance stays the same, so you need a separate plan to repay it all at the end.
On this page
What does interest-only mortgage mean?
On an interest-only mortgage, each monthly payment covers just the interest charged on the loan. None of it goes towards reducing the capital, so the amount you owe stays the same throughout the term.
At the end of the term you still owe the full amount you borrowed, and you must repay it in one lump sum — so lenders require evidence of a credible “repayment vehicle” to clear it.
How an interest-only mortgage works
Because you are only paying interest, the monthly payments are lower than on a repayment mortgage of the same size. But you build up no equity through the payments themselves — the debt does not shrink.
You need a separate plan to repay the capital: for example, savings, investments (such as ISAs), a pension lump sum, or selling the property. Lenders check this plan is realistic before lending, and review it during the term.
How could this affect me?
Interest-only can suit buy-to-let landlords and some borrowers with a genuine, funded plan to repay, because the lower payments improve monthly cash flow. For a typical residential buyer they are now much harder to get.
The big risk is reaching the end of the term without enough to repay the capital — which can force a sale of your home. If your repayment plan is investment-based, a poor return could leave a shortfall.
Things to watch out for
- The balance never reduces through your payments — you still owe the full amount at the end.
- If your repayment plan (savings or investments) underperforms, you could face a shortfall and have to sell.
- Lower monthly payments can look cheap, but the total interest over the term is usually higher than a repayment deal.
Know your rights
- Interest-only mortgages are regulated by the FCA under its MCOB rules, which require lenders to assess affordability and check a credible repayment strategy.
- A lender must normally get a court order before repossessing your home.
- You can complain and escalate to the Financial Ombudsman Service if a lender treats you unfairly.
General information, not personal advice
Consumer Credit is an independent information service. We do not provide regulated financial advice or sell financial products. For advice on your own situation, speak to an appropriately authorised firm or a free service such as MoneyHelper. About Consumer Credit.
Sources
We checked this page against these official and authoritative sources.
- MoneyHelper, Interest-only and repayment mortgages explained (opens in a new tab). Accessed 22 Aug 2026.
- FCA, MCOB — Mortgages and Home Finance: Conduct of Business (opens in a new tab). Accessed 22 Aug 2026.