How Interest-Only Mortgages Work
With an interest-only mortgage, your monthly payment covers only the interest on the loan. You do not pay down any of the capital balance during the mortgage term. At the end of the term (typically 25 years), you must repay the original capital in a single lump sum.
For example, a £250,000 interest-only mortgage at 5% has monthly payments of around £1,042. At the end of 25 years, you will have paid around £312,500 in interest, and you still owe the original £250,000 capital. You need a credible plan — called a repayment vehicle — to clear that balance at maturity.
Compare this to a £250,000 repayment mortgage at 5% over 25 years: monthly payments of around £1,461, total interest of around £188,300, and a zero balance at the end. Interest-only saves £419 a month in cash flow but costs more in total interest and leaves the £250,000 capital to settle.
Acceptable Repayment Vehicles
UK lenders require you to demonstrate a credible way of repaying the capital at the end of the term. Accepted repayment vehicles typically include:
- Sale of the mortgaged property — only accepted by some lenders, and usually requires significant equity (often £200,000+ of projected equity) and a minimum property value
- ISAs and investment portfolios — stocks and shares ISAs with a documented contribution plan projected to reach the required value
- Pensions — the tax-free lump sum (25%) is commonly accepted, backed by a recent pension statement
- Endowment policies — legacy vehicles from the 1990s, still accepted if projections are adequate
- Sale of a buy-to-let property or second home — requires clear evidence of ownership and equity
- Cash savings — less commonly accepted on full interest-only loans
Most lenders will ask for annual evidence that your repayment vehicle is on track, and may require a partial capital conversion if projections fall short.
Lender Criteria in 2026
Interest-only remortgage criteria vary widely between lenders. A typical 2026 snapshot:
| Lender | Max LTV | Minimum Income | Repayment Vehicles Accepted |
|---|---|---|---|
| Metro Bank | 75% | £75,000 sole / £100,000 joint | Sale of property (£300k+ equity), ISAs, pensions |
| Santander | 75% | £50,000 sole / £75,000 joint | ISAs, pensions, sale of second property |
| Halifax | 75% | £75,000 sole | Sale, ISAs, pensions, endowments |
| Barclays | 75% | £75,000 combined | Sale, investments, pensions |
| Nationwide | 60% | £50,000 sole | Sale, ISAs, pensions |
| Coventry BS | 65% | Case by case | Broad range, flexible |
| Leeds BS | 60% | Case by case | Retirement interest-only specialist |
Part-and-part mortgages — where, say, £150,000 is on repayment and £100,000 is on interest-only — are accepted by most of the above and often suit borrowers who want to reduce payments without going fully interest-only.
Interest-Only vs Repayment — Cost Comparison
Illustrative comparison on a £200,000 mortgage at 5% over 25 years:
| Metric | Interest-Only | Repayment |
|---|---|---|
| Monthly payment | £833 | £1,169 |
| Total interest paid over 25 years | £250,000 | £150,700 |
| Balance at end of term | £200,000 owed | £0 |
| Monthly cash flow advantage | +£336 | — |
If you invested the £336 monthly saving into a stocks and shares ISA averaging 6% annual return, you would accumulate around £232,000 over 25 years — slightly more than the £200,000 needed to clear the mortgage. This is the theoretical case for interest-only, but it depends on actual investment returns, discipline, and fees.
