Interest Only Mortgages – Explained
Interest-only mortgages aren't for everyone, but in the right circumstances, they can be a smart financial tool. At Dwello, we'll give you honest guidance about whether interest-only makes sense for your situation – because while the monthly payments are lower, the long-term implications need careful consideration.
These mortgages are much less common for residential properties than they were 15-20 years ago, but they still play an important role, particularly in the buy-to-let market.
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How it Differs from Repayment Mortgages
The difference is fundamental:
Interest only
£200,000 borrowed =
£200,000 owed at the end
£200,000 owed at the end
+ all the interest paid over the years.
Monthly payments are lower because you're only servicing the debt, not reducing it.
Repayment
£200,000 borrowed =
£0 owed at the end
£0 owed at the end
because your monthly payments have gradually paid off both interest and capital.
Monthly payments are higher, but you're building ownership.
For residential properties
Interest-only mortgages are quite challenging to obtain. Lenders have strict criteria because they need confidence you can repay the full loan amount when it's due.
You might qualify if you have:
Substantial equity in the property (typically £200,000-£250,000 or more)
Credible repayment strategies like sizeable pensions, businesses you plan to sell, or other investments
The ability to downsize to a smaller property to release equity
Very high income that supports both the interest payments and building separate repayment funds
For buy-to-let investors, the picture is different.
Around 90% of buy-to-let mortgages use interest-only structures because:
Investors often want to maximise cash flow from rental income
They may prefer to use spare cash for additional property purchases rather than paying down existing loans
Capital growth often provides the "repayment strategy" through property value increases
Business cash flow considerations make lower monthly payments attractive
Repayment Strategy Planning
This is the crucial element that makes or breaks an interest-only mortgage application. Lenders need to see a realistic plan for how you'll repay the loan.
Acceptable repayment strategies typically include:
Pension funds that will be available at retirement
Business sale proceeds if you're planning to sell a profitable business
Investment portfolios with projected growth
Downsizing plans if you have substantial property equity
Other property sales if you own multiple properties
Risks and Considerations
The main risks are significant:
Outstanding debt remains.
You're not building equity through mortgage payments, so if property values fall, you could end up in negative equity more easily than with a repayment mortgage.
Repayment strategy might fail.
Pensions might be smaller than expected, businesses might not sell for anticipated amounts, or investment returns might disappoint.
Interest rate risk.
If rates rise significantly, your monthly payments increase but you're not reducing the loan balance to offset this.
Limited future options.
Fewer lenders offer interest-only products, which can make remortgaging more challenging.
For residential properties especially, these risks explain why interest-only mortgages have become much less popular than they were in previous decades.
For residential properties especially, these risks explain why interest-only mortgages have become much less popular than they were in previous decades.
Limited future options.
Fewer lenders offer interest-only products, which can make remortgaging more challenging.
For residential properties especially, these risks explain why interest-only mortgages have become much less popular than they were in previous decades.
For residential properties especially, these risks explain why interest-only mortgages have become much less popular than they were in previous decades.
Our approach is straightforward:
Getting a mortgage in the UK can feel like a full-time job. Whether it’s your first time or your fifth, the process is often anything but clear.
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The information contained in this article does not constitute financial or mortgage advice from Dwello Mortgages. It is provided for general informational and educational purposes only. No information contained constitutes a solicitation, recommendation, endorsement or offer by Dwello.
Dwello is not making any representations or warranties, and assumes no liability, for the content provided in this article, including any third party information. Consumers should always consult their own financial advisors before making any mortgage or remortgage decisions based on this type of general market commentary and analysis.
All mortgage pricing, rate scenarios and cost comparisons used are hypothetical examples. Actual rates, fees and mortgage costs may vary based on the specific lender and the individual borrower's personal financial circumstances.
Dwello Mortgages, a trading style of Dwello Mortgages Limited is an appointed representative of HL Partnership Limited which is authorised and regulated by the Financial Conduct Authority. Dwello Mortgages Limited is registered in England and Wales with company number 14432864. Registered Office: St James House, Hollinswood Road, Telford TF2 9TW
Dwello is not making any representations or warranties, and assumes no liability, for the content provided in this article, including any third party information. Consumers should always consult their own financial advisors before making any mortgage or remortgage decisions based on this type of general market commentary and analysis.
All mortgage pricing, rate scenarios and cost comparisons used are hypothetical examples. Actual rates, fees and mortgage costs may vary based on the specific lender and the individual borrower's personal financial circumstances.
Dwello Mortgages, a trading style of Dwello Mortgages Limited is an appointed representative of HL Partnership Limited which is authorised and regulated by the Financial Conduct Authority. Dwello Mortgages Limited is registered in England and Wales with company number 14432864. Registered Office: St James House, Hollinswood Road, Telford TF2 9TW
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