Interest-Only Mortgages Lenders Explained

Laura Broad[1]

Laura Broad

Money Savings Advice Interest-only mortgage lenders explained

Mortgages where you only pay off the interest as you go and tackle the lump sum that you originally borrowed at the end of the term are called interest-only mortgages.

They’re less popular than your standard repayment mortgage, but there are still a handful of lenders in the UK who are willing to lend you money on an interest-only repayment basis.

How Many Interest-Only Mortgage Lenders Are There?

There are fewer interest-only mortgage lenders in the UK than previously, due to the high volume of mis-sold mortgage compensation claims. You can still apply for an interest-only mortgage with selected lenders.

Interest-only mortgages are deemed to be risky due to the large lump sum owed in the distant future. After all, a lot can happen in 25 years, and this is a common mortgage term.

So what do you need to know when looking for an interest-only mortgage lender, what questions should you be asked, and what are the red flags to watch out for that could mean bad mortgage advice?

This guide will answer all of these questions and more.

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Should You Consider an Interest-Only Mortgage?

Before you go looking for an interest-only mortgage lender, you should be crystal clear whether an interest-only mortgage is right for you. There are both advantages and risks to interest-only mortgages that you, as a borrower, should be aware of.

Advantages of Interest-Only Mortgages

Lower monthly repayments are the appeal here. If you’ve got a lot of money in the bank or a lot of equity tied up elsewhere, you’ll be able to afford to pay back the lump sum at the end.

Over the course of the mortgage, you can invest the savings you make in your repayments (compared to a repayment mortgage) into your home and potentially increase its value or invest them elsewhere. This makes interest-only mortgages popular for those wanting to go down the buy-to-let route and become a landlord.

Disadvantages of Interest-Only Mortgages

Interest-only mortgages are risky. Banks don’t want to risk you being unable to make your repayment at the end, so many have stopped offering these mortgages altogether.

They also often cost you more than a repayment mortgage would in the long run. As you don’t chip away at the actual amount you owe, this figure never decreases unless you specifically choose to make repayments or remortgage to a repayment mortgage later on.

If you don’t have a plan to save money throughout the mortgage term, you may have to rely on selling the property to pay off the debt at the end. This is risky if the property market is in a slump and house prices fall as you end up having to sell it for less than you borrowed. You would then be left having to fund any repayment gap through other means.

Will You Be Accepted for an Interest-Only Mortgage?

Before the financial crash hit in 2008, interest-only mortgages were more popular than they are now. Nevertheless, most high street banks still offer them; you just have to meet stricter criteria to be approved.

You’re more likely to be approved for an interest-only mortgage if:

  • You’re a high-earner (over £50,000 annual income). This gives lenders peace of mind that you’ll be able to afford your repayments at the end of the term.
  • You borrow less. Many lenders offer mortgages around the 50%-75% LTV ratio meaning you can only borrow around half to three-quarters of the value of your home. If you can borrow 50%, you’re more likely to be approved as you’re a lower risk.
  • Hold a large amount of equity in your property. If you’re planning on selling the property to pay the bill at the end of the term, having at least £200,000 of equity held in it makes you more likely to be approved for the mortgage.

How to Find an Interest-Only Mortgage Lender

One place to start when looking for interest-only mortgage lenders is a comparison site. You can compare things like maximum LTV, initial interest rate and how many years that rate is fixed for and overall cost between different mortgages and lenders.

You’ll also be able to check that you meet the eligibility criteria for approval. For example, different lenders may offer different mortgage terms (or not approve applications) based on:

  • Your age (e.g. some cap at a maximum of age 65, some 70, some 75)
  • Whether you’re a permanent UK resident
  • Whether you’re an existing borrower, first-time buyer or looking to remortgage
  • Whether you’re self-employed or employed by a firm
  • Whether you live in England, Wales, Scotland or Northern Ireland
  • Whether you have any history of missed mortgage payments or arrears 

Alternatively, you could opt to discuss your options with lenders directly. A mortgage broker may also be able to get you a better deal than those available to the general public.

Red Flags to Avoid

Remember our advantages, disadvantages and risks from earlier? Any good mortgage lender will take the time to carefully explain all of these to you and give you enough clear information so that you fully understand what you’re getting yourself in for.

This is just one of the rules that the Financial Conduct Authority sets out to minimise the risk of you being given bad mortgage advice. If your lender breaks any of these rules or doesn’t meet their obligations, you could be owed compensation for a mis-sold mortgage.

Here are some common warning signs of interest-only mortgage mis-selling to be aware of:

  • You’re not told exactly how the mortgage works, and it isn’t clearly explained to you that you will only be paying off the interest each month.
  • You’re not informed that you will need to pay back the lump sum you borrowed at the end of the mortgage term.
  • They’re willing to approve you without a thorough dive into your personal circumstances, financial situation and ability to meet the repayments expected of you.
  • The risks involved with interest-only mortgages are not clearly explained to you.
  • You’re not shown comparisons of monthly repayments between repayment and interest-only mortgages for you to make your own informed decisions.
  • You aren’t asked to explain how you plan to pay your lump sum at the end, or they accept uncertain plans like relying on risky investments or inheritance.

If any of these things happen during the process of being sold an interest-only mortgage, it likely counts as bad financial advice. If you go ahead and take out the mortgage with that lender, you may be mis-sold to and be at more risk of financial harm.

If you’ve already taken out your mortgage and any of the above sound familiar, you may be able to make a mis-sold interest-only mortgage claim to recover some of your losses through compensation.

How Can Money Savings Advice Help You With Making an Interest Only Mortgage Compensation Claim?

Here at Money Savings Advice, we have partnered with some of the UK’s leading Financial Claims management companies. They have already helped thousands of people claim compensation for mis-sold financial products and they can do the same for you.

Choosing an independent claims management company means they won’t proceed with a claim unless they are sure it is in your best interests. They are also regulated by the FCA, which gives you an additional layer of protection.

If you would like to speak to one of these claim management companies who can help you make a compensation claim, then click on the below and answer the very simple questions.


Money Savings Advice Author Laura Broad

Laura Broad

Laura is a professional content writer and learning designer, passionate about empowering people through straightforward, jargon-free content. When she's not reading or writing about all things personal finance, you can find her in the gym, barbell in hand.

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