Interest-Only Mortgage Calculator

How the interest-only mortgage calculator works

On an interest-only mortgage, your monthly payment covers only the interest charged on the outstanding balance. The capital — the amount you originally borrowed — does not reduce during the term. At the end of the mortgage, the full original loan remains due and must be repaid in a single lump sum. The monthly payment is simply the loan amount multiplied by the annual interest rate, divided by twelve. Because no capital is being repaid, the payment stays constant for the life of the deal (assuming the rate does not change).

Interest-only mortgages were common before the 2008 financial crisis but lenders now require borrowers to demonstrate a credible repayment strategy — typically the proceeds of an investment portfolio, the planned sale of the property, or a separate savings vehicle such as an ISA or pension.

Interest-only versus repayment

The lower monthly payment of an interest-only mortgage may appear attractive, but the total cost is considerably higher than a repayment mortgage at the same rate. With a repayment mortgage, each payment reduces the capital balance, so less interest accrues over time. With interest-only, the balance never reduces, meaning interest is charged on the full loan for the entire term. The difference in total interest paid can be substantial on a long-term mortgage.

Frequently asked questions

Who can get an interest-only mortgage?

Interest-only mortgages are available to residential and buy-to-let borrowers, but lenders apply strict eligibility criteria. Residential interest-only applicants typically need a high income, a low LTV (often below 75%), and a documented repayment strategy. Buy-to-let mortgages are more commonly offered on an interest-only basis, as rental income is expected to service the interest and the property itself is the repayment vehicle.

What repayment strategies do lenders accept?

Lenders accept a range of repayment vehicles. Common options include an endowment policy, a stocks and shares ISA, a pension (where the tax-free lump sum will cover the loan), the planned sale of another property, or the sale of the mortgaged property itself. Lenders will assess the credibility and projected value of the repayment vehicle against the outstanding balance.

Can I switch from interest-only to repayment?

Yes — most lenders allow borrowers to switch to a repayment basis at any point, subject to affordability assessment. Switching increases the monthly payment but reduces the capital over time, removing the need for a separate repayment strategy. Many borrowers switch to part-and-part arrangements, where a portion of the loan is on repayment.

Is the monthly payment shown here accurate?

The calculator assumes a constant interest rate throughout the term. If you are on a tracker or variable rate, your actual payments will change as the underlying rate moves. For fixed-rate periods the figure is accurate for the duration of the fix.

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