Interest-only mortgage
An interest-only mortgage is a loan where monthly payments cover only the interest charged on the borrowed amount, not the capital itself. The balance owed stays the same throughout the term and must be repaid in full at the end, either from savings, investments, by remortgaging, or by selling the rental property. MoneyHelper explains that interest-only borrowing relies on a separate repayment plan to clear the capital at term end, rather than paying it off month by month.
The vast majority of buy-to-let mortgages in the UK are arranged on an interest-only basis. This is the standard structure for landlords, not the exception.
Interest-only vs repayment: the practical difference
With a repayment mortgage, each monthly payment covers both interest and a portion of the capital, so the loan gradually reduces and is fully paid off by the end of the term. With an interest-only mortgage, the monthly payment covers only the interest, meaning payments are lower but the capital debt does not reduce.
A straightforward example: on a £200,000 buy-to-let mortgage at an interest rate of 5%, the interest-only monthly payment is approximately £833. On a 25-year repayment mortgage at the same rate, the monthly payment is approximately £1,169. The £336 monthly saving is the primary reason most landlords choose interest-only, it maximises the chance that rental income covers the mortgage while leaving cashflow available for voids, maintenance, and portfolio growth.
Use our buy-to-let mortgage calculator to model interest-only and repayment scenarios on your own numbers.
Why interest-only suits most buy-to-let landlords
Interest-only works for buy-to-let because the lender's affordability test, the interest coverage ratio, is calculated on interest payments, not capital repayments. Lower monthly payments make it easier for rental income to meet the 125% or 145% ICR threshold lenders require. A property that would fail an ICR test on a repayment mortgage may comfortably pass on interest-only.
The lower monthly commitment also provides a buffer against void periods. If a property sits empty, a landlord on interest-only faces a lower cash outflow than one on a repayment mortgage, reducing the pressure on personal finances or a contingency reserve.
Most landlords plan to repay the capital by one of the following routes at term end: selling the property (often after capital growth), refinancing onto a new mortgage product, using accumulated savings or investments built up alongside the mortgage, or passing the property to heirs as part of estate planning. Most buy-to-let lenders accept the eventual sale or refinancing as the exit strategy without requiring a formal separate repayment vehicle, unlike residential interest-only mortgages where lenders apply stricter repayment vehicle requirements.
The tax reality: Section 24 and the hidden cost
The apparent cashflow advantage of interest-only is real, but the post-tax reality for many landlords is more complicated. Under Section 24 of the Finance (No. 2) Act 2015, individual landlords cannot deduct mortgage interest from rental income before calculating tax. Instead, since April 2020, they receive only a 20% basic-rate tax credit on mortgage interest payments. See our mortgage interest relief definition for the full background.
For a basic-rate taxpayer, this is broadly neutral, the 20% credit replaces the 20% deduction they previously had. For a higher-rate taxpayer, the change is material: they previously obtained 40% relief on each pound of mortgage interest; they now obtain only 20%. On a £200,000 interest-only mortgage at 5%, the annual interest cost is £10,000. A higher-rate taxpayer previously received £4,000 of tax relief on this; now they receive £2,000. The £2,000 annual difference is real additional tax that does not appear in a simple cashflow calculation based on the gross rent minus the monthly payment.
This is why the Section 24 change has driven many higher-rate taxpaying landlords towards limited company ownership. Within a company, mortgage interest remains fully deductible as a business expense before corporation tax, restoring the full relief on interest costs. For landlords weighing the limited company route, our guide to forming a limited company covers when it makes sense.
Risks specific to interest-only
The capital risk. With interest-only, the original loan amount is due in full at the end of the term regardless of what has happened to property values or lending markets. A property that falls in value, or a market where lenders apply stricter criteria at remortgage time, can leave a landlord unable to refinance or forced to sell at a loss.
The tenancy risk. If a tenant stops paying rent and falls into rent arrears, the mortgage still requires payment. From 1 May 2026, the Renters' Rights Act abolishes Section 21 and most tenancies become open-ended periodic tenancies. Possession for rent arrears requires Section 8 notice and specific grounds for possession, with court timelines that can be months. The ability to end a tenancy quickly and reset cashflows, previously a partial backstop for rent arrears, is no longer available.
The accumulation risk. Because the capital is not reducing month by month, a landlord who does not build a separate repayment fund alongside the mortgage faces a large lump sum at term end with no automatic mechanism to meet it. Maintaining a sinking fund or systematic investment account alongside the mortgage is a discipline that interest-only requires but the mortgage structure itself does not enforce.
From working with self-managing landlords across the UK, August finds that the end-of-term capital repayment risk is most often underweighted at the point of purchase, landlords focus on monthly cashflow and assume refinancing will be available at term end. A clear written repayment strategy, reviewed periodically, is the most practical safeguard.
What happens at the end of the term
At the end of an interest-only mortgage term, the lender requires the full capital balance to be repaid immediately. The lender will typically issue a redemption statement confirming the exact sum. Options at that point include: selling the property and using the proceeds to repay the loan (keeping any remaining equity); remortgaging onto a new interest-only or repayment product with the same or a different lender; or repaying the capital from savings, pension, or other assets.
If none of these is possible, for example, if property values have fallen or lending criteria have tightened, the lender has the right to take possession of the property. This is a genuine end-of-term risk that is easy to underestimate when interest-only is taken out, particularly on long terms where the capital repayment date feels distant.
Frequently asked questions
Are all buy-to-let mortgages interest-only?
Most are, but repayment buy-to-let mortgages are available. Some landlords choose repayment to build equity over time, reduce debt exposure, or plan for retirement without a reliance on refinancing. Lenders may also require repayment in certain circumstances, for example, where rental yields are lower and ICR is tighter on the interest-only basis alone.
Can I switch from interest-only to repayment?
Yes, with lender agreement. Switching from interest-only to repayment increases the monthly payment significantly (to cover the capital element) so the lender will reassess affordability. If your current lender will not permit the switch, you may be able to remortgage to a repayment product with a different lender at the end of a fixed-rate term. A part-and-part mortgage, part interest-only, part repayment, is another option that reduces the final capital lump sum while keeping payments manageable.
Does a limited company change the tax treatment of mortgage interest?
Yes materially. Within a limited company, mortgage interest is a fully deductible business expense, meaning the company pays corporation tax only on net profit after interest. This restores effective full relief on mortgage interest, unlike the 20% credit available to individual landlords under Section 24. The decision to use a limited company involves CGT, SDLT, and extraction costs that offset the tax advantage for some landlords, a specialist accountant's advice is essential before incorporating.
