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Interest only mortgages
Who is this page for?
This page is for anyone looking to buy a home with an interest only mortgage. For first-time buyers or shared ownership mortgages, head back to our mortgages help and guidance page.
What is an interest only mortgage?
When you’re applying for a mortgage, there are two main types you can choose – repayment mortgages and interest only mortgages.
An interest only mortgage works by paying the interest of a mortgage each month, not the amount borrowed – this is called capital. When the mortgage term ends, you will need to pay back the full mortgage amount. How much you’ve borrowed stays the same until then.
This is different to a repayment mortgage, where you’ll pay both the capital and interest each month.
How does an interest only mortgage work?
At the end of an interest only mortgage term, you need to have paid off the original amount borrowed. This is usually through the sale of a property, or with investments.
Who can apply for an interest only mortgage?
Interest only mortgages are often used for Buy to Let properties. It’s also possible to get one for a residential property you want to live in – if you meet the lender’s policy requirements.
There are specific rules when applying for an interest only mortgage. For example, a low loan to value (LTV) ratio or a high annual income.
Providers may want more details on how you will repay the mortgage at the end of the term.
This is called a repayment vehicle – inheritance, for example, can’t be used as a repayment vehicle. Funds that are usually accepted as a repayment vehicle include:
- Shares
- Your pension
- Investment bond
- Stocks and shares ISAs
- Endowment policies
If you have an interest only mortgage with Lloyds Bank, you may want to read our existing customers FAQs page.
Repaying an interest only mortgage
Interest rates for interest only mortgages can be:
- Fixed – Interest rates stay the same for a set amount of time.
- Variable – Interest rates can change during the course of the mortgage.
There are lots of factors when it comes to the cost of mortgage repayments – including fees, interest rates and amount of time the mortgage will run for. For an estimation of how much an interest only mortgage might cost you, depending on the amount you want to borrow, try our mortgage calculator.
It’s important to check your finances to make sure you’re on track to pay off the full mortgage amount at the end of the agreed term. If your mortgage ends and you can’t repay it in full, your home may be repossessed.
If you don’t think you’ll be able to raise the money to pay off an interest only mortgage, there are actions you can take before the term ends. These include:
The content on this page is for reference and does not constitute finance advice.
For impartial financial advice, we recommend government bodies like the MoneyHelper.
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