How Interest-Only Works
With an interest-only mortgage, your monthly payments cover only the interest charged on the loan. You do not repay any of the capital during the mortgage term. At the end of the term — typically 25 years — you owe the same amount you originally borrowed and must repay it in full.
For example, if you borrow £150,000 on an interest-only basis at 5%, your monthly payment would be £625. On a repayment basis over 25 years at the same rate, the payment would be approximately £877. The difference of £252 per month makes interest-only attractive for landlords focused on cash flow.
Why Landlords Choose Interest-Only
Interest-only mortgages are popular with buy-to-let landlords for several reasons. Lower monthly payments improve cash flow and rental yield, making the investment more profitable month to month. The surplus rental income can be used for maintenance, tax liabilities, or reinvested into additional properties.
Many landlords also plan to sell the property at the end of the mortgage term to repay the capital, betting on property price growth over the long term. Others use the cash flow advantage to build a portfolio more quickly, remortgaging to release equity as property values rise.
Repayment Strategies
Lenders will want to know how you plan to repay the capital when the mortgage term ends. Acceptable repayment strategies typically include sale of the property, sale of other assets or investments, savings or investment plans, or switching to a repayment mortgage later in the term.
The most common strategy among BTL landlords is selling the property. If the property has increased in value, the sale proceeds will cover the mortgage balance with surplus equity remaining. However, this relies on property prices at least maintaining their current level — not a guarantee, particularly over shorter periods.
Risks and Considerations
The main risk of interest-only is that you build no equity through repayments. If property values fall, you could owe more than the property is worth. You also face the challenge of repaying a large capital sum at the end of the term, which can be problematic if your planned strategy no longer works.
Lenders are increasingly scrutinising interest-only applications and may require a credible, documented repayment plan. If you are approaching the end of your mortgage term without a clear strategy, speak to a broker about your options — including switching to repayment, extending the term, or selling.
Important: Your home may be repossessed if you do not keep up repayments on your mortgage. There will be a fee for mortgage advice. The actual rate available will depend on your circumstances. Think carefully before securing other debts against your home.