Calculate monthly interest payments and compare with a repayment mortgage to understand the true cost.
This calculator provides estimates for guidance only. It does not constitute financial advice. Interest-only mortgages carry the risk that the capital may not be repaid at term end. Always consult a qualified mortgage adviser before making financial decisions.
An interest-only mortgage lets you pay only the interest on your loan each month, without reducing the capital balance. This means your monthly payments are significantly lower than a repayment mortgage, but you still owe the full original amount at the end of the term. You need a separate plan to repay the capital, known as a repayment vehicle. Interest-only mortgages were common in the UK before the 2008 financial crisis. Stricter FCA regulations now require lenders to verify that borrowers have a credible repayment strategy. They remain popular for buy-to-let investors who plan to sell the property at term end, and for some residential borrowers with substantial other assets. This calculator shows your monthly interest payment, compares it with a repayment mortgage equivalent, and calculates how much you would need to save or invest each month to accumulate the capital by the end of the term.
To calculate your interest-only mortgage costs: 1. Enter the mortgage amount. This is the total you are borrowing from the lender. 2. Set the interest rate. Enter the annual rate on your mortgage deal. 3. Adjust the mortgage term using the slider. This is the number of years before the full capital must be repaid. 4. Choose your repayment vehicle from the dropdown. Options include investment (stocks and shares ISA), savings account, property sale, or no plan yet. The investment and savings options calculate how much you need to contribute monthly. 5. Set the expected growth rate. This is the annual return you expect from your investment or savings. A typical long-term stock market return is 5-7%, while savings accounts may offer 2-4%. This field only applies to investment and savings repayment vehicles. 6. Review the results. The calculator shows your monthly interest payment, total interest over the term, capital still owed at the end, and a comparison with what a repayment mortgage would cost. The line chart illustrates how the outstanding balance compares between interest-only and repayment approaches over time.
The monthly interest payment on an interest-only mortgage is straightforward: Monthly interest = mortgage amount x annual rate / 12 / 100 For example, GBP 200,000 at 4.5% = GBP 200,000 x 4.5 / 1200 = GBP 750 per month. The total interest cost over the term is simply the monthly interest multiplied by the total number of months: GBP 750 x 300 = GBP 225,000. At the end of the term, you still owe the full GBP 200,000. For comparison, the repayment mortgage equivalent is calculated using the standard annuity formula: M = P x [r(1+r)^n] / [(1+r)^n - 1]. The repayment vehicle contribution uses the future value of an annuity formula in reverse. To accumulate a target sum (the mortgage amount) over a given period at an expected growth rate, the monthly contribution is: PMT = FV x r / [(1+r)^n - 1], where FV is the target amount, r is the monthly growth rate, and n is the total months. This gives the amount you need to set aside each month so that, with compound growth, you have enough to repay the capital when the mortgage term ends.
Inputs: Mortgage amount: GBP 200,000, Interest rate: 4.5%, Term: 25 years, Repayment vehicle: Investment, Growth rate: 5%
Inputs: Mortgage amount: GBP 350,000, Interest rate: 5%, Term: 20 years, Repayment vehicle: Savings, Growth rate: 3%
Interest-only mortgages carry significant risk. If your repayment vehicle underperforms, you may not have enough to repay the capital at term end. Stock market investments can lose value, and savings rates may fall below expectations. Some borrowers have found themselves unable to repay and have had to sell their homes. The FCA now requires lenders to assess the credibility of your repayment strategy. Simply saying "I will sell the property" may not be sufficient if the property value could fall. A combination of strategies is often recommended. This calculator assumes a fixed interest rate for the entire term. In practice, interest-only rates may change when your fixed deal expires, moving to the lender's standard variable rate which is usually higher.