Interest-Only Mortgages: Who Can Still Get One and How They Work

For much of the 1990s and 2000s, interest-only mortgages were sold widely across the UK market with minimal scrutiny of how borrowers intended to repay the capital at the end of the term. The consequences — an estimated 1.8 million mortgages reaching maturity without adequate repayment vehicles — led the Financial Conduct Authority (FCA) to intervene decisively after 2014. The result was a structural tightening that effectively removed interest-only products from the mainstream residential market.

That does not mean interest-only mortgages no longer exist. They remain available to specific categories of borrower — high-net-worth individuals, portfolio landlords, and those who can demonstrate a credible, documented repayment strategy. This guide explains where interest-only lending currently sits, what lenders require, and the risks that have not changed despite the regulatory overhaul.

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How Interest-Only Mortgages Work

On a capital repayment mortgage, each monthly payment reduces both the interest accrued and a portion of the outstanding capital. Over a 25-year term, assuming consistent payments, the balance reaches zero at the end.

On an interest-only mortgage, the monthly payment covers only the interest. At the end of the term — whether 10, 15, 20, or 25 years — the full original capital sum remains outstanding and must be repaid in a single lump sum.

The obvious attraction is a materially lower monthly payment. On a £500,000 mortgage at 4.5%, the interest-only monthly payment is approximately £1,875. The equivalent repayment payment over 25 years is approximately £2,778 — nearly £900 more per month. For cash-flow-conscious investors and HNW borrowers who deploy capital elsewhere, that difference can be significant.

The critical caveat is that the lower payment is not a saving — it is a deferral. Every pound of capital deferred accrues interest for the full term. Over 25 years, an interest-only borrower on a £500,000 mortgage at 4.5% pays approximately £562,500 in interest alone, compared with roughly £333,000 on a repayment mortgage. The interest cost is substantially higher in absolute terms.

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The FCA's 2014 Restrictions and What Changed

The Mortgage Market Review (MMR), implemented in April 2014, required lenders to assess interest-only applications on the credibility of the borrower's proposed repayment vehicle — not just their ability to meet monthly payments. Vague assurances that the property would be sold were no longer sufficient. Documented, evidence-based strategies became mandatory.

The practical effect was that most high-street lenders stopped offering interest-only residential mortgages to standard borrowers. The mainstream products that remain are now concentrated in three areas:

1. Residential interest-only for high-net-worth borrowers — lenders including HSBC Private Banking, Coutts, Barclays Wealth, Santander Private Banking, and some building societies offer IO for borrowers meeting specific wealth or income thresholds (often £1m+ in assets or £300,000+ annual income).

2. Buy-to-let interest-only — IO is the standard product type for buy-to-let mortgages and was less affected by MMR, since BTL is not regulated in the same way as residential lending. The vast majority of BTL mortgages are taken on an interest-only basis.

3. Later-life lending — Retirement Interest Only (RIO) mortgages, introduced in 2018, are discussed separately below.

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Acceptable Repayment Vehicles

For regulated residential interest-only lending, lenders require borrowers to demonstrate a credible repayment vehicle at the outset. Acceptable vehicles vary by lender but generally include:

Stocks and shares ISAs or investment portfolios Lenders may accept a projected portfolio value at term end, though they typically apply a conservative growth rate and require regular evidence that the portfolio is on track. The risk is that investment performance may not match projections.

Pension lump sums From age 55 (rising to 57 from April 2028), up to 25% of a pension fund can typically be taken as a tax-free lump sum, though this is now capped by the Lump Sum Allowance (£268,275) following the abolition of the Lifetime Allowance on 6 April 2024 — so on larger funds the tax-free element is limited in absolute terms. Some lenders accept the projected lump sum as a repayment vehicle, subject to the projected pension value at the expected retirement date exceeding the outstanding mortgage by a meaningful margin.

Sale of the mortgaged property The FCA-mandated restriction was largely targeted at this vehicle when used alone without any equity cushion or realistic sale plan. Some lenders still accept planned sale as a repayment strategy, but typically require a significant LTV buffer — say, lending only to 50% LTV on an IO basis so that the sale proceeds clearly exceed the outstanding debt even in a falling market.

Sale of another property or asset Documentary evidence of ownership of other assets — a second property, a business interest, a land holding — can support an IO application. The lender will typically require a valuation and will apply a haircut to the stated value.

Proceeds of a trust or inheritance Less common and harder for lenders to underwrite, but acceptable in some private banking contexts where the trust structure is documented and professionally managed.

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The Term-End Risk

The history of interest-only lending in the UK makes the term-end risk starkly clear. Borrowers who took IO mortgages in the early 2000s, intending to rely on property price growth to repay the capital, found themselves either requiring extended terms, converting to repayment mortgages with significantly higher monthly payments, or in the most serious cases, facing forced sale.

Even with a credible repayment vehicle, there is an execution risk. Markets can fall. Pension funds can underperform. ISAs can be raided in emergencies. Lenders are required to conduct annual or biennial reviews of IO borrowers to check that repayment strategies remain on track, but these reviews are only useful if the borrower responds honestly and takes corrective action when there is a shortfall.

Borrowers considering interest-only should carry out their own frank assessment: if the repayment vehicle materially underperforms, what is the fallback? Can the mortgage be converted to repayment, and would the resulting payments be affordable? Is there sufficient equity in the property to sell and repay the debt?

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Converting from Interest-Only to Repayment

Most lenders allow borrowers to convert from interest-only to repayment mid-term, though the mechanics vary. Switching typically triggers a fresh affordability assessment, since the monthly payment will increase significantly. If the borrower's income or financial position has changed adversely since the original application, conversion may not be straightforward.

Partial conversion — moving part of the balance to repayment while keeping the remainder on IO — is offered by some lenders and can be a useful middle ground for borrowers who want to start building equity without the full payment increase.

For borrowers approaching term end who cannot repay in full, lenders have regulatory obligations under FCA guidance to treat customers fairly. Options typically explored include extending the term, converting to repayment, or offering a RIO mortgage if the borrower is of eligible age. However, none of these options are guaranteed, and mortgage prisoners — borrowers who cannot remortgage away from a lender — face fewer options.

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Retirement Interest Only (RIO) Mortgages

RIO mortgages were launched in 2018 as a specific product for older borrowers who could not take a standard interest-only mortgage (often due to term constraints — a 65-year-old cannot easily take a 25-year mortgage). The distinguishing feature is the repayment mechanism: rather than a fixed end date, the mortgage is repaid when the borrower dies, moves into long-term care, or sells the property.

Monthly payments cover only the interest, as with a standard IO mortgage. The capital balance does not reduce. This means the full loan amount will eventually be repaid from the property sale proceeds, potentially reducing the estate available to heirs.

RIO mortgages require the borrower to demonstrate they can sustainably meet the monthly interest payments from retirement income — pension income, annuity income, investment income — for the foreseeable future. There is no end-of-term capital repayment risk in the traditional sense, since the property itself is the repayment vehicle.

RIO mortgages are regulated by the FCA and are distinct from equity release (lifetime mortgages), where no monthly payment is required and interest compounds. RIO is generally preferable to equity release for borrowers who can afford the monthly payments and wish to control the pace at which equity is reduced.

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Interest-Only Buy-to-Let

For buy-to-let landlords, interest-only remains the dominant mortgage structure. The lower monthly payment improves rental yield calculations and allows investors to preserve capital for further acquisitions or refurbishment. BTL IO mortgages are unregulated by the FCA in most cases (unless the property is intended to be occupied by the borrower or a family member, in which case consumer buy-to-let rules apply).

Since April 2020, landlords subject to Section 24 cannot deduct mortgage interest as a business expense — instead receiving a 20% tax credit on finance costs. This has reduced the tax advantage of interest-only for higher-rate taxpayer landlords, particularly on highly geared portfolios. Limited company landlords, however, can still deduct mortgage interest as a business cost, which maintains the economic rationale for IO structures within a corporate vehicle.

Portfolio landlords — those with four or more mortgaged properties — face additional scrutiny from lenders, including a portfolio stress test and assessment of the overall portfolio income. IO is available in this context through specialist lenders including Paragon, Fleet Mortgages, and Foundation Home Loans.

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International Borrowers and Interest-Only

For non-UK-resident borrowers, interest-only is more readily available than in the domestic market — partly because international buyers tend to be higher earners or higher-net-worth individuals who meet private banking thresholds, and partly because IO is standard for investment property finance globally. HSBC Expat, Coutts, and Barclays International are among the providers who offer IO structures to overseas borrowers purchasing UK property.

Borrowers with overseas assets — a property portfolio abroad, an offshore investment account — can sometimes use those assets as the documented repayment vehicle, subject to lender acceptance of the asset type and jurisdiction.

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How Global Investments can help

Global Investments advises internationally mobile clients and UK-based property investors on structuring property finance to match their circumstances. Interest-only borrowing can be the right tool for the right borrower — but it demands rigorous planning around the repayment vehicle and honest stress-testing of the term-end position.

We can connect you with specialist mortgage advisers and private banking contacts experienced with interest-only products, including for expat buyers and portfolio landlords. We can also help you think through the interaction between mortgage structure, tax efficiency, and long-term portfolio planning.

Nothing in this guide is mortgage or financial advice. Rules around interest-only lending, including FCA regulations and lender criteria, change regularly. Tax treatment of buy-to-let finance costs is subject to HMRC rules that may change. Property values can fall as well as rise. Your home or investment property may be at risk if you do not maintain mortgage repayments. Always seek regulated mortgage and tax advice before proceeding.