Interest-Only vs Repayment Calculator

Frequently asked questions

How do you calculate an interest-only mortgage payment?

Multiply the balance by the annual interest rate and divide by 12. Because none of the capital is repaid, the balance never changes, so the payment is identical every month for the whole term. On a £250,000 balance at 4.5% the monthly payment is £937.50, in the first month and in the last. A repayment mortgage instead uses the annuity formula, where the level payment clears both interest and capital by the end of the term.

Is an interest-only mortgage cheaper?

Monthly, yes; overall, no. On £250,000 at 4.5% over 25 years, interest-only costs £452.08 a month less, but £281,250 in total interest against £166,874 on repayment, because you pay interest on the full balance for the entire term rather than on a falling one. Add the £250,000 still outstanding at the end and interest-only costs roughly £114,000 more while leaving you owning nothing.

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

The full original balance falls due as a lump sum. You clear it from your repayment vehicle, typically savings, investments, pension tax-free cash or the sale of a property. If the plan has fallen short, the remaining options are remortgaging onto a new deal, extending the term if a lender agrees, switching to repayment at a much higher monthly cost, or selling the property. Lenders should contact you well before this point, but the responsibility to fund it is yours.

Can I still get an interest-only mortgage in the UK?

Yes, but on tighter criteria than before 2008. Residential lenders generally require a lower loan-to-value than on repayment, a higher minimum income, and documented evidence of a credible repayment strategy, which the FCA requires them to assess rather than assume. Buy-to-let lending is largely still arranged on interest-only, and Retirement Interest-Only mortgages are a separate product repaid from the sale of the property.

What is a repayment vehicle?

It is the funded plan for clearing the capital at the end of an interest-only term. Lenders commonly accept ISAs and other investments, pension tax-free cash, the sale of a second property, or downsizing where there is sufficient equity, and they usually set a minimum-equity threshold before accepting downsizing. Anything dependent on investment growth carries the risk of a shortfall, so review it against the outstanding balance periodically rather than at the end of the term.

Can I switch to interest-only temporarily?

Under the Mortgage Charter, eligible borrowers can move to interest-only for a limited period, commonly up to six months, without a full affordability re-check and without it affecting their credit file. Check your lender's current policy, as eligibility rules vary. It is genuine breathing room, but the capital you did not repay still attracts interest and your payment afterwards is recalculated higher over the shorter remaining term.

What is a part-and-part mortgage?

Part of the balance is on repayment and part on interest-only. The monthly payment falls between the two options, and only the interest-only portion is outstanding at the end of the term, which is a far smaller sum to fund than the whole balance. It is often a sensible middle route where a full repayment mortgage is unaffordable but a full interest-only one leaves too large a lump sum to clear.

Should I switch from interest-only to repayment?

If you can afford the higher payment and have no strong repayment vehicle, switching usually costs far less overall, because you stop paying interest on a balance that never falls and you end the term owning the property. Most lenders allow a switch without a new application, though the monthly increase can be steep, especially later in the term when the capital has to be cleared over fewer remaining years. Part-and-part is worth asking about if the full repayment figure is out of reach.