An interest-only mortgage is a mortgage where the monthly payments cover only the interest charged on the loan, not the capital. At the end of the mortgage term, the full original loan must be repaid in a lump sum.
On a repayment mortgage, each monthly payment reduces the outstanding balance — so at the end of the term, the mortgage is fully repaid. On an interest-only mortgage, the balance remains at the original amount throughout the term. Monthly payments are significantly lower, but the borrower must have a credible repayment plan (investments, ISA, pension, property sale) to repay the capital at the end.
Buy-to-let investors (where rental income covers interest and capital growth provides exit strategy). High-income earners with clear repayment vehicles. They are rarely appropriate for residential owner-occupiers without a robust and monitored repayment plan — thousands of homeowners were left with capital shortfalls when interest-only mortgages matured in the 2010s.