Interest-Only Mortgage Rates Explained: Are They Worth It in 2025?

With the cost of living continuing to climb, more homeowners and property investors are turning to interest-only mortgages as a way to keep their monthly payments manageable.

Many UK lenders offer this option, but does it make sense for your circumstances?

Our guide breaks down how interest-only mortgages work, their pros and cons, factors affecting rates, and who they’re best suited to.

What’s an Interest-Only Mortgage?

With an interest-only mortgage, your monthly payments cover just the interest on your loan. The amount you originally borrowed stays exactly the same throughout the entire term.

For example, if you borrow £200,000 interest-only over 15 years, you will still owe £200,000 after 15 years. You need a workable plan to repay the outstanding sum at the end of the mortgage term.

This works differently from standard repayment mortgages like fixed rate mortgages and variable rate mortgages, where each monthly payment chips away at both the interest and the loan balance itself.

How Do Interest-Only Mortgage Rates Work in the UK?

Interest-only mortgage rates are influenced by the same factors as other mortgages, including:

• The Bank of England base rate
• Specific lenders’ policies
• Market competition
• Product type (e.g., residential buy-to-let)

However, interest-only deals come with stricter criteria and potentially higher rates compared to repayment loans. Lenders see them as higher risk, especially for residential properties. Buy-to-Let mortgages in areas of strong rental demand are often considered a safer bet for interest only mortgages since their solid investment potential protects the value.

Interest-only periods vary depending on the lender, borrower, and deal. They can range from a few years to 20 or 25 years.

You can usually switch from interest-only to repayment later if your circumstances change.

Different Types of Interest-Only Mortgages

There are three main types of interest-only deals:

• Fixed-rate: The interest rate remains the same for an agreed period (e.g., 2, 5, 10 years). This provides stability and makes budgeting easier.
• Variable rate: The interest rate can change at any time based on the lender’s discretion (usually influenced by market conditions, including the Bank of England base rate).
• Tracker: The interest rate tracks a base rate plus a set percentage.

Pros and Cons of Interest-Only Mortgages

While interest-only loans reduce monthly outgoings and offer some flexibility, it’s important to also recognise their drawbacks.

Benefits of Interest-Only Mortgages

• Lower monthly payments: Paying interest only on your home loan frees up cash for other needs.
• Short-term flexibility: Ideal if you expect your income to rise or want to invest elsewhere.
• Investment potential: Particularly popular with buy-to-let investors aiming to maximise rental yield.

Possible pitfalls of interest only

• Capital repayment: You’ll need to repay the full loan amount at the end of the term.
• Higher rates/costs: These mortgages are more expensive over time.
• Property value risk: If your home’s value drops, selling to repay the loan may not cover the balance.
• Stricter lending criteria: Lenders typically require higher deposits and proof of a solid repayment plan.

Who Qualifies for an Interest-Only Mortgage?

Getting approved for an interest-only mortgage usually means meeting stricter requirements than standard mortgages:

• A larger deposit (often at least 25% or more)
• A minimum income threshold (£75,000 a year, or a combined joint income of £100,000 is a guide)
• A credible repayment strategy (e.g., investments, pension, property sale to settle the full amount)
• Age limits: For example, banks may require the interest-only term to end before you turn 70.

Buy-to-let borrowers may find more flexibility, but still need to meet lender-specific criteria.

How to Repay an Interest-Only Mortgage

What happens at the end of an interest-only mortgage? When your loan term expires, you are responsible for repaying the remaining balance.

Common repayment options are:

• Selling the property: This is a popular choice, but if your property’s value has decreased, the sale proceeds may be inadequate for full repayment. In the worst case, you may not be able to sell your property which could result in your home being at risk of repossession.
• Using savings or investments: Ideally, you want what’s called a “repayment vehicle” to clear the debt at the end of the term. This could be an ISA, investments/savings, or a pension lump sum. The risk with these is that investments can fluctuate and you may not end up with as much as you thought to repay the loan.
• Remortgaging: You might be eligible to remortgage to another deal or switch to a repayment mortgage to pay off the capital at a later date if you know your circumstances will be changing.

A common question is, “Can you pay off an interest-only mortgage early?” Most interest-only deals let you sell your house during the loan term and repay the mortgage early, although this could be subject to an early repayment charge.

Are Interest-Only Mortgages Still Available and Worth It?

Although interest-only products are not as widely offered as before the 2008 financial crisis, there are still many offerings in the current market.

For the right borrower, especially investors and those with a viable mortgage repayment plan wanting flexibility, they remain a worthwhile option.

Finding the Best Interest-Only Mortgage Rates in 2025

If you’re wondering, “Can I get an interest-only mortgage?” you’ll be pleased to know that the current market offers various options with different loan-to-value ratios, qualifying criteria, terms, and fees. To compare and clinch the best deal, why not speak to a qualified mortgage advisor?

At Flagstone, we provide expert, tailored advice on interest-only mortgages to seasoned homeowners and property investors. Flagstone is an independent broker with access to the entire market, so get in touch with our friendly mortgage broker team and let us find exclusive rates for you.

FAQs

Is it a good idea to get an interest-only mortgage loan?

It depends on your personal circumstances. If you have a clear repayment plan and need short-term flexibility, it could work well. But without a solid strategy, the risks can outweigh the benefits.

Can I switch to an interest-only mortgage?

Many lenders let you switch to an interest-only mortgage, provided you meet the mortgage criteria, which may include evidence of a repayment plan and a large deposit or significant equity in the property.