Interest-Only Mortgage Rates UK

An interest-only mortgage can be right for you if you want to buy a property and keep monthly payments low since you’re only paying the interest. According to statistics, 49% of UK households are still experiencing the cost-of-living crisis as of September 2024, making the lower monthly payments of interest-only mortgages more attractive.

However, they can be more expensive overall and carry more risk than a repayment mortgage, so it’s vital to ensure you make an informed decision. This guide explores interest-only mortgage rates in the UK and everything you need to know when looking at interest-only mortgage deals.

What Are Interest-Only Mortgages?

Interest-only mortgages are a type of mortgage product where the monthly payments only cover the interest you owe and not the capital you borrow. You only repay the capital as a lump sum at the end of the mortgage term. For example, if you take out an interest-only mortgage for £150,000, you’ll still owe the lender £150,000 at the end of your mortgage term.

Although the monthly repayments work out cheaper, the long-term costs are higher since the interest is charged on the total amount each month for the entire term.

What Are the Best Interest-Only Mortgage Rates in the UK?

Interest-only mortgage rates in the UK can be fixed or variable, and they usually differ between lenders so it’s always recommended to shop around to find the best deals. Generally, interest-only mortgages feature higher interest rates than standard repayment mortgages since there’s more risk to the lender.

The table below can give you a rough idea of the interest-only mortgage rates available among different lenders.

The rates are accurate as of September 2024 but can change at the lender’s discretion. Various mortgage rate calculators are available online to help you compare the rates among different lenders based on factors like property value, mortgage amount, and term.

A specialist mortgage broker can also help you access some of the best interest-only mortgage rates available by giving you access to the entire market and offering bespoke rates suitable for your circumstances.

Does Deposit Affect Interest-Only Mortgage Rates?

Yes! The amount of deposit you have can affect the interest-only mortgage rate you get. A considerable deposit will lower the loan-to-value (LTV) ratio, which is the amount of the property’s value the mortgage will cover. For example, if you have a 20% deposit and take out a mortgage to cover the rest of the property’s value, the LTV will be 80%.

Most lenders have caps on the minimum LTV they can accept on interest-only mortgages. The lower the LTV, the higher your chances of getting favourable rates from the lender. A larger deposit will also give you access to more lenders and mortgage deals since you’ll be considered a lower risk.

Can You Get a Residential Interest-Only Mortgage?

Although it’s not impossible to get a residential interest-only mortgage, it’s more challenging than getting one for a buy-to-let property. Not all lenders offer interest-only mortgages because they’re considered high risk, and those who do feature strict eligibility criteria. These include:

• Large deposits – You must have a substantial deposit to qualify, such as 25%. Some lenders insist on higher amounts and reserve the best rates for those with deposits of 40% and above.

• High incomes – Some lenders will set higher minimum income requirements for residential interest-only mortgages, while others will only consider high net-worth individuals. Minimum thresholds can range from £50,000 – £75,000 per year for single applicants or a combined income of £100,000 for joint applicants.

• Repayment plan – Lenders will require you to have a solid repayment plan for clearing the lump sum at the end of the mortgage term. These can include savings, investments in shares or bonds, a pension plan, unit trusts, selling a different property, or selling other assets like vehicles.

• Standard property – Most lenders will only consider your application if you’re buying a property with standard construction. Properties with non-standard constructions, like those with timer frames, pose higher risks for lenders.

Can You Switch to An Interest-Only Mortgage?

Yes. It’s possible to switch from a repayment mortgage to an interest-only mortgage if your lender agrees, and it can be an effective short-term solution to keeping your monthly payments manageable.

Thanks to the government’s Mortgage Charter introduced in 2023, you can get a temporary breather by switching to an interest-only mortgage without worrying about affordability assessments or credit checks. It makes it easier to switch for six months and get temporary relief by lowering your monthly outgoings. You’ll then revert to your original repayment structure after six months.

If you’re considering a long-term switch to an interest-only mortgage, you must ensure you meet the lender’s criteria and have a robust repayment plan.

Can You Get a Part Interest-Only Mortgage?

Yes. Such products are called part and part mortgages, and they combine both capital and interest-only repayments. Half-repayment and half-interest mortgages allow you to repay a portion instead of all of your mortgage through monthly repayments, leaving you with a smaller balance to settle at the end of the term.

A part interest-only mortgage offers unique benefits, including:

• Paying less in monthly repayments than a repayment mortgage
• Reducing the amount you would have paid at the end of an interest-only mortgage
• Paying less interest than an interest-only mortgage since the debt reduces over time

However, you still need to have a feasible repayment strategy to clear the lumpsum at the end of the mortgage.

Can Remortgaging Reduce Interest-Only Mortgage Rates?

It’s possible to get better rates when remortgaging on an interest-only mortgage since you’ll likely have more equity, which reduces the risk for the lender. If you’ve already paid down a large amount of your mortgage or the property has risen in value, you can get reasonable rates on an interest-only remortgage and save money on monthly payments.

You can shop around for better deals or ask your current lender about their offers since most providers usually have exclusive rates for existing customers.

Final Thoughts

Interest-only mortgages can ensure your monthly payments remain low, but they’re riskier than repayment mortgages and feature higher long-term costs. Consulting an experienced mortgage broker can help you access some of the best interest-only mortgage rates available by giving you access to the entire market.

Sources and References: 

• https://www.statista.com/statistics/1300280/great-britain-cost-of-living-increase/#:~:text=British%20adults%20reporting%20a%20cost%20of%20living%20increase%202021%2D2024&text=As%20of%20September%202024%2C%2049,45%20percent%20in%20late%20July.
• https://www.gov.uk/government/publications/mortgage-charter/mortgage-charter