An interest-only mortgage keeps your monthly payments low by charging you only the interest on the loan, never the capital. The catch is simple and it is the whole story: at the end of the term you still owe every penny you borrowed. A repayment mortgage costs more each month but clears the debt entirely, so by the final payment you own the property outright.
This guide walks through how each type is worked out, what it costs over a full term, the FCA rules that decide whether you can get one, and how to model your own numbers.
Not financial advice. Mortgage criteria and interest rates vary between lenders and change often. Always speak to an FCA regulated mortgage adviser before committing. Sources: FCA Handbook MCOB 11.6 (responsible lending, interest-only); UK Finance interest-only mortgage data (June 2026); HomeOwners Alliance interest-only guide (2026). Rates used below are illustrative, check live rates before relying on any figure.
How is an interest-only mortgage calculated?
The monthly payment on an interest-only mortgage is the simplest sum in the mortgage world:
Monthly payment = (loan balance x annual interest rate) / 12
On a £200,000 loan at an annual rate of 5%, that is £200,000 x 0.05, which is £10,000 of interest a year, divided by 12. So you pay about £833 a month, and the balance stays at £200,000 for the entire term.
How is a repayment mortgage calculated?
A repayment (also called capital and interest) mortgage uses the standard amortisation formula, which blends a shrinking interest charge with a growing capital payment so the balance reaches zero on the last month:
M = P x [ r(1 + r)^n ] / [ (1 + r)^n - 1 ]
where P = loan balance, r = monthly rate (annual rate / 12), n = total number of months
On the same £200,000 at 5% over 25 years (300 months), that formula gives a monthly payment of about £1,169. Higher than interest-only, but every payment chips away at the capital.
Interest-only vs repayment: the full cost comparison
Here is the same £200,000 loan at 5% over 25 years, shown both ways:
| Interest-only | Repayment | |
|---|---|---|
| Monthly payment | £833 | £1,169 |
| Balance still owed at the end | £200,000 | £0 |
| Total interest paid over the term | £250,000 | about £150,800 |
| Do you own the home at the end? | Only after repaying the £200,000 | Yes |
Interest-only saves you around £336 a month here, which is real money in the budget. But you pay roughly £100,000 more interest across the term, and you still have to produce £200,000 from somewhere on the final day. That "somewhere" is what lenders care about most.
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Can I get an interest-only mortgage in 2026?
For a residential home, interest-only is available but restricted. Under the FCA's responsible lending rules (MCOB 11.6), a lender can only offer it where you have a clearly understood and credible repayment strategy, a genuine plan to clear the capital that the lender has checked and accepted.
What counts as a credible repayment strategy?
The FCA gives examples of plans lenders may accept and plans they must reject.
| Acceptable (MCOB 11.6.45) | Not acceptable (MCOB 11.6.46) |
|---|---|
| Regular savings or investment contributions | Hoping house prices simply rise |
| Selling other assets, property or land | An uncertain future inheritance |
| Periodic capital repayments from irregular income | Selling your only home without checking the sale covers the mortgage and a new place to live |
Crucially, there is no single FCA maximum loan to value. The equity and LTV limits are set by each lender's own policy, not by the regulator (MCOB 11.6.51). Lenders must also review your repayment plan at least once during the term, with enough time left for you to act if it is drifting off track.
What lenders actually ask for
In practice, the big residential lenders cluster around similar rules in 2026:
| Requirement | Typical residential position |
|---|---|
| Minimum income | Around £75,000 sole, £100,000 joint at major lenders |
| Maximum loan to value | Usually 75%, so a deposit of at least 25% |
| Repayment vehicle | Evidenced and accepted before completion |
| Part-and-part option | Up to around 85% combined, with the interest-only slice capped near 75% |
Sources for the table: HomeOwners Alliance interest-only guide (2026) and individual lender intermediary criteria (Nationwide, Halifax, Barclays, Virgin Money), accessed July 2026. Criteria change per product, so treat these as a guide, not a promise.
Proposed rule changes worth knowing about
In 2026 the FCA consulted on relaxing some of these rules (consultation paper CP26/18), including removing the credible repayment strategy requirement where the interest-only portion is below 25% of the property value, and explicitly allowing "convert to a repayment mortgage later" as a valid strategy. These are proposals, not yet in force. The consultation closed on 28 July 2026 with a policy statement expected later in the year, so the position may shift. Check the current rules before you apply.
Why almost every buy-to-let mortgage is interest-only
Interest-only is the standard choice for landlords, not the exception. It keeps monthly costs low, maximises the rental margin, and suits a plan to sell the property later to release the capital. Lenders typically want the rent to cover between 125% and 140% of the interest payment, a deposit of 20% to 25% or more, and buy-to-let rates tend to run around half a point to a full point higher than the equivalent residential deal.
What is a part-and-part mortgage?
Part-and-part splits the loan in two: one slice on interest-only, the rest on repayment. Say you borrow £200,000 and put £100,000 on each basis. You clear £100,000 over the term and still owe £100,000 at the end, so your monthly payment sits between the two pure options, and your final bill is half the size of a full interest-only loan. It is a sensible middle path when full repayment is a stretch but you would rather not owe the entire balance at the end.
What are the risks?
The core risk is baked into the design: the balance never falls, so the whole loan depends on your repayment plan actually working. If your investments underperform or your circumstances change, you can reach the end of the term with a gap between what you have saved and what you owe. FCA modelling has suggested the real chance of some shortfall is higher than borrowers themselves expect, which is exactly why the repayment-strategy checks exist. The good news is that the number of pure interest-only mortgages in the UK keeps falling, down almost 18% to around 445,000 in 2025 according to UK Finance, as borrowers move onto repayment or clear their loans.
Also check
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See the full monthly repayment and a complete amortisation schedule across any rate and term.
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- How much can I borrow for a mortgage?: income multiples, stress tests and deposits explained