Your interest-only mortgage
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Interest-only mortgages
How does an interest-only mortgage work?
With an interest-only mortgage, you only pay interest charged on the loan. At the end of the mortgage term, you will still owe the original amount borrowed.
The interest payment amounts are based on the outstanding mortgage balance. The mortgage balance will not reduce over the mortgage term, so you will end up paying more in the long run.
Example
If you have a £250,000 interest-only mortgage for 25 years, you'll pay the interest on the amount borrowed each month.
When the 25 years are up, you'll have to repay the full £250,000.
Discuss your mortgage
Whether you have an existing mortgage with us on an interest-only or capital repayment basis, get advice from our friendly mortgage advisers.
Call us on 08000 288 288 (call charges apply).
If you have concerns with your existing repayment plan or need advice on making a plan, we strongly recommend you get advice from an independent financial adviser.
You can also find useful information and free impartial advice about interest-only mortgages from MoneyHelper.
Regularly check you’re on track to repay in full
You should regularly review your repayment plans to make sure they remain on track. They need to provide enough money to repay your mortgage in full at the end of the term.
If you think any of your repayment vehicles might not provide the amount you expected, please let us know as soon as possible. We can help you make alternative arrangements. Otherwise it may be necessary to sell your property.
Worried about repaying your mortgage?
Do not delay – the sooner you take action, the better. There are several ways to close the gap between your outstanding mortgage balance and the value of your current repayment plan. For example, you could use a further repayment vehicle, or one of the following options.
Switch to capital repayment
You could convert some or all of the outstanding balance of your loan to a capital and interest repayment mortgage over a term suitable and affordable to you. We will not charge you for doing this, and it would mean that if you make all the repayments, more or all of your mortgage will be fully repaid at the end of the term.
You can discuss this option by contacting us on 08000 288 288. Call charges apply.
Overpay your mortgage
Making additional payments will reduce the outstanding mortgage balance, which in turn will reduce the amount of interest you are charged and leave you with less to pay when the term expires. Early repayment charges may apply and the details of these will be stated in your original mortgage documentation.
Get a later life mortgage
This is a way of releasing money from your home without having to move. The money released will be in the form of a loan secured against your home and must be used to repay your existing mortgage balance with us.
We’ve partnered with Legal & General, who offer their later life mortgage products to our residential mortgage customers. You can read more about Legal & General later life mortgages, or contact us for more information.
Switch to an interest-only mortgage
You can apply to switch to an interest-only mortgage through us or through your broker.
If you’re struggling with your repayments, you could be eligible to temporarily switch through the Mortgage Charter support scheme (for up to six months).
Switching to interest-only through us
Eligibility criteria
Before applying, you should:
- Consider if an interest-only mortgage is right for you – remember you’ll pay more overall.
- Use our calculator to check what your new monthly repayments would be.
- Build a suitable repayment plan with one or more repayment vehicles, and consider getting independent financial advice to help you with this.
Repayment vehicles
A repayment vehicle is a way to repay the total amount you have borrowed, at the end of your mortgage term.
You can view the repayment vehicles we accept below. You can also check what proof you need to provide and how to calculate if it will repay the mortgage balance.
You can use one vehicle alone, or use a combination as part of your repayment plan.
Endowment policies
Vehicle requirements
The endowment policies must be:
- purchased in the UK
- administered by an FCA-regulated financial services firm with ‘authorised’ status.
Evidence requirements
As evidence, you need to provide a copy of the latest projection statement.
This must be:
- dated within the last 12 months
- showing payments are up to date
- in the applicant(s)’ names only.
Calculation requirements
The value to use when calculating how much of the capital element of your mortgage this vehicle will cover is the middle (amber) projection.
Savings
Vehicle requirements
The savings must:
- be held in a UK savings account
- be administered by an FCA regulated financial services firm with ‘authorised’ status
- be in Great British Pounds / UK Sterling only
- have been held for a minimum of 12 months
- be in the applicant(s)’ names only.
Evidence requirements
As evidence, you need to provide a copy of the latest savings statement.
This must be:
- dated within the last 12 months
- showing payments are up to date
- in the applicant(s)’ names only.
Calculation requirements
The value to use when calculating how much of the capital element of your mortgage this vehicle will cover is the current value of the savings.
Investment plans (professionally managed)
Vehicle requirements
The investment plan must be:
- a unit trust, an open ended investment company (UK), an investment bond (UK), or a stocks and shares ISA (all stocks and shares held in a stocks and shares ISA)
- professionally managed
- administered by an FCA regulated financial services firm with ‘authorised’ status
- in Great British Pounds / UK Sterling only
- in the applicant(s)’ names only.
Evidence requirements
As evidence, you need to provide a copy of the latest statement issued by the administering company for the managed investment plan.
And this must be dated within the last 12 months.
Calculation requirements
The value to use when calculating how much of the capital element of your mortgage this vehicle will cover is the current value of the savings.
Share portfolio
Vehicle requirements
The share portfolio must be:
- administered by an FCA regulated financial services firm with ‘authorised’ status
- in the applicant(s)’ names only.
Evidence requirements
As evidence, you need to provide a statement or confirmation from an authorised stock broker.
And this must:
- contain evidence of shareholdings, and their current valuation
- be dated within the last 12 months.
Calculation requirements
The value to use when calculating how much of the capital element of your mortgage this vehicle will cover is the current cash value of the share portfolio.
Pension
Using your pension as a repayment vehicle will reduce your income at retirement.
Vehicle requirements
The pension must be a defined contribution scheme or a final salary defined benefit scheme. You can also use any lump sum you’re due as part of the pension payments.
Evidence requirements
As evidence, you need to provide a document from the pension provider which shows the pension type and amount.
And this must:
- be dated within the last 12 months
- show that your retirement date is the same as or earlier than the end of the mortgage term.
If you’re using a lump sum, you also need to provide confirmation from the pension provider of the tax-free lump sum amount at retirement.
Calculation requirements
The values to use when calculating how much of the capital element of your mortgage this vehicle will cover are:
- the projected tax-free cash sum (or if your provider has not confirmed whether you’re being issued a lump sum, only up to 25% of the projected sum can be used)
- the tax-free lump sum (where the pension or retirement age is the same as or earlier than the end of the mortgage term).
If the evidence supplied shows several growth rates, we can only accept the lowest figure.
Sale of second UK property (including buy to let)
Vehicle requirements
We accept buy-to-let properties. The property you intend to sell must be:
- not the property for which you’re attempting to switch to an interest only mortgage
- in the UK.
Evidence requirements
As evidence, you need to provide a document proving that you own the property.
And this must:
- show that you own the property solely or jointly (not co-owned with any further parties)
- show the mortgage balance
- be dated in the last 12 months.
You also need to provide an independent valuation. This must:
- be a letter or report
- be issued by a RICS or NAEA registered estate agent
- be dated in the last 12 months.
Calculation requirements
The value to use when calculating how much of the capital element of your mortgage this vehicle will cover is the level of equity. This is the valuation result minus the interest only loan amount.
We will also conduct a credit search and land registry check, to check for any outstanding charges in order to verify the level of equity.
Remember that the value of the property could decrease before you come to sell it, so this payment vehicle could fall short of your expectations and you may need to find another way to pay the difference.
Sale of main residence
Vehicle requirements
The property you intend to sell must be your main residence.
Evidence requirements
As evidence, you need to provide a declaration that you will sell your property as a repayment vehicle for your interest only mortgage.
You’ll also need to provide proof of a valuation, showing the property has an equity of at least £300,000. If you’ll use this vehicle in combination with another vehicle, the equity must still amount to at least £300,000.
Calculation requirements
To calculate the amount of equity available, simply take away the loan amount from the property value.
If the mortgage is part interest-only and part capital and repayment, the equity calculation includes the capital and repayment element of the mortgage.
For example:
Property value: £706,000
Loan amount £600,000 (85% LTV)
Interest only: £406,000
Repayment: £194,000
Equity including repayment element: £300,000
We will also conduct a credit search and land registry check, to check for any outstanding charges in order to verify the level of equity.
Remember that the value of the property could decrease before you come to sell it, so this payment vehicle could fall short of your expectations and you may need to find another way to pay the difference.
Please remember:
- it is your responsibility to make sure that you have enough funds to repay your mortgage at the end of the term
- your home may be repossessed if you do not keep up with repayments on your mortgage.
Supporting documentation
For all interest-only mortgages, the following documents are to be held on file (as applicable):
- Sale of main residence declaration - confirms main residence is the repayment vehicle.
- Repayment strategy declaration - confirms repayment plan and vehicle(s).
Supporting documents can be found below:
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