Interest-only mortgages

Find out how you could reduce your monthly payments with an interest-only mortgage. Our guide includes information on the benefits and eligibility criteria of this mortgage type, as well as tips for switching to an interest-only mortgage with Saga.

What is an interest-only mortgage?

When you take out an interest-only mortgage, you only pay the interest each month on the amount you’ve borrowed. This results in lower monthly payments compared to a repayment mortgage, where you repay the loan and interest each month.

At the end of the interest-only mortgage term, you need to repay the full loan amount. If you don’t have enough money, you might need to sell the property to pay off your loan. As with any mortgage, the loan is secured against your home. And if you can’t maintain your monthly payments, your home may be repossessed.

Why choose an interest-only mortgage?

An interest-only mortgage makes your monthly costs more affordable in the short term. It might suit you if you’re low on funds now and expect to be better off in the future. For example, you might inherit money from a loved one.

Before a mortgage provider approves your interest-only mortgage, they may ask for proof that you can pay off the loan at the end of the term. This is known as a ‘repayment vehicle’ and could be proof of an investment, an ISA or a life insurance policy.

Another option at the end of your interest-only mortgage term is to switch to a repayment mortgage. This will usually increase your monthly payments, but it allows you to pay off your mortgage in full.

What are the criteria for an interest-only mortgage?

Lenders each have their own criteria when it comes to interest-only mortgages, but there are some common requirements you’re likely to come across:

• A clear repayment plan – You’ll need to show how you intend to repay the full loan amount (the capital) at the end of the term. This could be through savings, investments or the sale of another property.
• Proof of income – Lenders will want to see that you can comfortably afford the monthly interest payments. Some may also set a minimum income threshold.
• Loan-to-value (LTV) limits – You may need to retain a significant amount of equity in the property. Many lenders cap the LTV at around 50%, meaning you can usually borrow up to half the property’s value.
• A good credit history – A strong credit score helps reassure lenders that you’re likely to keep up with repayments.
• Age limits – Some lenders set an upper age limit for when the mortgage term ends, often between 70 and 75.
• Property type – Interest-only mortgages are more commonly available for buy-to-let properties, though some lenders may offer them for residential use in specific circumstances.

Pros and cons of an interest-only mortgage

Interest-only mortgages don’t suit everyone, so it’s important to weigh up the pros and cons first.

Benefits of an interest-only mortgage

Some of the benefits of interest-only mortgages include:

• You get the flexibility to pay less now and more in the future when you have the finances required.
• If you come into money sooner than you expected, you could pay back the loan faster than with a repayment mortgage.
• You could sell the property to repay the loan at the end of the term. If house prices are on the rise, you might make a profit on the sale even after repaying the loan.

Risks and disadvantages of an interest-only mortgage

Some of the disadvantages of interest-only mortgages include:

• As you're only paying the interest each month, your mortgage balance won't fall. You'll need to pay the full loan amount at the end of the term.
• As your loan amount doesn’t fall, you’ll pay more interest in total than you would with a standard repayment mortgage.
• If you’re relying on an investment to cover the repayment at the end of the term, remember its value can go down as well as up. You could receive less than you invested, and you might not have enough to cover the loan’s cost.
• Some lenders don’t offer interest-only mortgages, so you’ll have a smaller choice of providers than with a standard repayment mortgage.

Why do interest-only mortgages suit landlords?

Some buy-to-let landlords opt for interest-only mortgages. This is because they can earn a regular income from rent, then sell the property at the end of the mortgage term to pay off the capital.

What’s the difference between an interest-only 

mortgage and a repayment mortgage?

When you take out a repayment mortgage, you pay back some of the loan and some interest each month. As long as you keep up with payments, you will pay off the entire loan by the end of the term.

The difference with an interest-only mortgage is that you only pay the interest on the loan each month. By the end of the term, the amount you borrowed won’t have decreased, so you’ll still need to pay it back.

What happens at the end of an interest-only mortgage?

When your interest-only mortgage comes to an end, you’ll need to repay the original loan amount (the capital), as your monthly payments will have only covered the interest.

Ideally, you’ll have a repayment plan in place – such as savings, investments, or other assets – to cover the amount you owe. 

If you’re unsure whether your plan is on track, it’s worth reviewing your options sooner rather than later. Our comprehensive guide to paying off an interest-only mortgage that’s ending has more information.

What if I can’t pay off my interest-only mortgage?

Unfortunately, not everyone will be able to pay off their interest-only mortgage when their term comes to an end. Fortunately, there are a few options available if you find yourself in this position. 

You could use a repayment plan you’ve set up over the years, extend the mortgage term or consider downsizing to a smaller property to release funds. 

Another option is remortgaging with another lender, where you could switch to a repayment mortgage and begin paying off the capital as part of your monthly repayments.

How Saga can help you with interest-only mortgages

We partner with Tembo Money to give you access to award-winning mortgage advice. Tembo’s expert advisors can chat through your options and help find an interest-only mortgage that works for you.

Get in touch today and discover how you could reduce your monthly payments with an interest-only mortgage.

Award-winning advice from Tembo

All mortgage advice provided by Saga Mortgages is supplied by Tembo Money Limited, which is regulated by the Financial Conduct Authority (FCA) under registration number 952652.

Their team of award-winning mortgage advisors can help you with a range of mortgage solutions, including:

• House buying.
• Retirement interest-only mortgages.
• Buy-to-lets.
• Remortgaging.
• Family-supported mortgages.
• Later life lending.