Interest only mortgage
An interest only mortgage is a mortgage where your monthly payments cover the interest on the loan, but you do not pay down the capital. At the end of the term, you still owe the original amount borrowed and must repay it in full using a separate “repayment strategy”. For example, savings, investments, remortgaging, or selling the rental property. MoneyHelper explains that interest-only borrowing relies on a repayment plan to clear the capital at term end, rather than paying it off month by month. The FCA similarly warns borrowers to have a plan to repay the capital, otherwise they may need to sell.
For landlords, the attraction is usually cashflow. Lower monthly payments can make rent cover the mortgage more comfortably, particularly when rates rise. The risk is concentration. If you’re betting on being able to refinance or sell when the term ends, and that the property value and lending criteria still work in your favour.
Tax is another key consideration. If you let a UK property personally, mortgage interest relief and other finance costs is restricted to a basic-rate tax reduction rather than a full deduction from rental profits. That means the headline affordability of an interest-only loan can look better than the post-tax reality.
Link this to tenancy risk. If your tenant falls into rent arrears, your mortgage still needs paying. From 1 May 2026 in England, the Renters’ Rights Act abolishes Section 21 notice and most tenancies become an open-ended periodic tenancy, so you cannot rely on “no-fault” possession to reset the situation. You’ll need to use Section 8 notice and the relevant grounds for possession, and timescales can be uncertain.
Stress-test the mortgage at higher interest rates and void periods, keep a clear repayment strategy, and maintain a contingency fund (similar to a sinking fund) for repairs and rent arrears, because with interest-only, the capital bill always arrives.
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