The regulatory landscape behind interest-only
Following the Mortgage Market Review in 2014, the FCA tightened interest-only lending substantially. Lenders must demonstrate that every interest-only borrower has a credible plan to repay the capital at the end of the term, and that the plan is being followed. The result was a 75% contraction in interest-only lending volumes, with several lenders exiting the product entirely.
The market that remains is selective but stable. Lenders who continue to offer interest-only have settled on a consistent set of criteria: maximum LTV between 50% and 75%, a defined list of acceptable repayment vehicles, and ongoing affordability checks at remortgage. The product is no longer a default option, but it's available and competitively priced for the right borrowers.
High-street lenders who still offer interest-only
Halifax offers residential interest-only up to 75% LTV with strict repayment vehicle criteria — investment portfolios must be valued at 120% of the mortgage balance, or property sale plans must demonstrate sufficient equity in another property. Halifax is the highest-volume high-street interest-only lender.
Santander allows interest-only up to 75% LTV with similar conditions, and has slightly broader acceptance of pension tax-free cash as a partial repayment vehicle. Nationwide caps at 75% LTV with conservative criteria — they generally require sale of the property combined with documented downsizing plans.
Barclays offers interest-only at 75% LTV with a £300,000 minimum loan size on most products — making it less accessible for smaller mortgages. NatWest restricts interest-only to 50% LTV on most products but has more relaxed criteria on the repayment vehicle within that lower ceiling.
HSBC has historically been restrictive on interest-only and currently limits the product to a narrow band of high-asset clients.
Building societies and specialists
Several building societies are materially more flexible than the high-street banks on interest-only criteria. Coventry Building Society offers residential interest-only up to 65% LTV with a broader range of accepted repayment vehicles, including ISAs and pension-linked plans. Leek United and Newbury Building Society both run interest-only ranges suited to older borrowers and those with investment portfolios. Suffolk Building Society is well-known among brokers for sensible underwriting of interest-only cases.
Family Building Society and Hodge specialise in lending to older borrowers and run interest-only products that consider pension income and downsizing more generously than mainstream lenders. Both are commonly recommended where the borrower is 60+ and has a clear property-downsize plan as the repayment vehicle.
Accepted repayment vehicles
The single biggest factor in whether your application succeeds is the repayment vehicle. Lenders treat these in roughly this hierarchy of acceptability:
- Investment portfolios (stocks and shares ISAs, GIAs) — accepted by most lenders, typically valued at 100%–120% of the mortgage balance. Recent statements required.
- Pension tax-free cash — accepted by many lenders if the pension is large enough and the term ends after age 55. Typically valued at 25% of projected pension value.
- Sale of the mortgaged property with downsizing plan — accepted if there's substantial equity (lender minimums vary, often £150,000–£200,000 of equity required).
- Sale of a second property — accepted with proof of ownership and reasonable equity expectations.
- Endowment policies — still accepted but increasingly rare as legacy policies mature.
- Inheritance — almost never accepted as a primary repayment vehicle. Considered too uncertain.
- Future bonuses or business sale — generally not accepted.
The part-and-part alternative
Many borrowers who can't qualify for fully interest-only can access a part-and-part mortgage — where part of the loan is repayment and part is interest-only. This sits between the cashflow flexibility of pure interest-only and the certainty of a repayment mortgage. Lenders are far more permissive on part-and-part: higher LTVs are available, and the repayment vehicle only needs to cover the interest-only portion.
A common structure: £400,000 mortgage at 65% LTV, split as £250,000 repayment over 25 years and £150,000 interest-only with sale of an investment portfolio as the repayment vehicle. Monthly cost is lower than fully repayment, the lender's risk is contained, and the investment portfolio only needs to back the £150,000 IO portion.
How affordability is assessed
Most lenders assess affordability on a capital-and-interest basis even when the product is interest-only. This is an FCA requirement — the borrower must be able to afford the loan on a repayment basis as a measure of sustainability. The practical effect is that interest-only doesn't increase your maximum borrowing — it just reduces your actual monthly payment during the term.
The interest-only product is essentially a cashflow management tool, not an affordability boost. Borrowers who think interest-only lets them buy a bigger house than they could on repayment are usually disappointed.
When interest-only is the right choice
Three borrower profiles consistently make good interest-only candidates. The first is the high-asset older borrower planning to downsize at retirement and wanting low payments through the working years. The second is the disciplined investor who can demonstrate that their long-term investment returns reliably exceed mortgage interest cost. The third is the BTL landlord — a market where interest-only is the standard product and tax-treatment makes it materially more efficient than repayment.
For most other residential borrowers, repayment is the safer default. The peace of mind of knowing the loan is gradually shrinking, and the protection against repayment vehicle underperformance, usually outweighs the cashflow saving.
Your home may be repossessed if you do not keep up repayments on your mortgage. First Rung Now is not FCA authorised or regulated; we introduce consumers to FCA-regulated mortgage brokers. Nothing in this article is financial advice.