If you are considering an interest only mortgage, understanding how rates work and what you can expect to pay is essential. While interest only rates are generally comparable to repayment rates, there are important nuances that can affect the deal you receive. This guide explains the current interest only rate landscape, what factors influence your rate, and how to secure the most competitive deal.
For a full overview of how interest only mortgages work, read our complete guide to interest only mortgages.
How are interest only mortgage rates set?
Interest only mortgage rates are set in the same way as repayment rates — driven by the Bank of England base rate, swap rates, and the lender's margin, with no additional premium for being interest only. Swap rates — the rates at which banks lend to each other over fixed periods — directly influence fixed-rate mortgage pricing. On top of these, lenders add their margin to cover operating costs, risk, and profit.
Crucially, lenders do not typically charge a different rate just because the mortgage is interest only rather than repayment. The rate is based on the product type (fixed, tracker, or variable), the loan-to-value ratio, the loan amount, and the borrower's risk profile. This means that, in theory, an interest only borrower and a repayment borrower with identical circumstances should receive the same rate.
Because residential interest only mortgages typically require a maximum 50% LTV, you may actually qualify for lower-rate products than many repayment borrowers at higher LTVs. A lower LTV signals less risk to the lender.
What factors affect your interest only mortgage rate?
Your loan-to-value ratio is the biggest factor — residential interest only borrowers at 50% LTV or below often qualify for the most competitive rate tiers available. Several other factors also influence the rate you are offered:
- Loan-to-value ratio: The lower your LTV, the better your rate is likely to be. Rates are typically tiered at 60%, 65%, 70%, 75%, and 80% LTV. Residential interest only borrowers at 50% LTV or below often access the most competitive tiers.
- Fixed vs variable: Fixed-rate products offer certainty but may carry a slight premium over tracker rates. Trackers follow the Bank of England base rate and can be cheaper initially, but your payments will change if rates move.
- Fix length: Two-year fixed rates may be lower than five-year fixes in some market conditions, though the relationship can invert. Longer fixes provide more certainty but may come with higher early repayment charges.
- Residential vs buy-to-let: BTL interest only rates are typically higher than residential rates, reflecting the additional risk associated with rental properties and the higher LTVs commonly used.
- Lender and product fees: A lower headline rate may come with a higher arrangement fee. Always compare the total cost of the mortgage, not just the rate. A broker can help you calculate the true cost.
- Income and creditworthiness: Your income level and credit history can affect which lenders will offer you a mortgage and at what rate. Higher earners with clean credit histories generally receive the best rates.
Should you choose a fixed or variable rate for an interest only mortgage?
Fixed rates give you payment certainty, while trackers may start lower but can rise — and on an interest only mortgage, rate changes hit harder because your balance never reduces. Here is how they compare:
| Feature | Fixed rate | Tracker / variable |
|---|---|---|
| Monthly payment | Stays the same for the fix period | Moves with the base rate |
| Certainty | High — you know exactly what you will pay | Low — payments can rise or fall |
| Initial rate | May be slightly higher | Often lower at outset |
| Early repayment charges | Usually apply during fix period | Often lower or none on trackers |
| Best when rates are | Expected to rise or stay stable | Expected to fall |
| Popular choice | 2 or 5-year fixed | Lifetime tracker or 2-year tracker |
For interest only borrowers, the choice of rate type is particularly important because any rate increase directly affects your monthly outgoings without the offsetting effect of a reducing balance (as would happen on a repayment mortgage). On a £300,000 interest only mortgage, a 1% rate increase adds £250 per month to your payments.
Five-year fixed rates remain the most popular choice for UK mortgage borrowers, offering a balance between rate certainty and flexibility. This trend holds for both interest only and repayment mortgages.
Are buy-to-let interest only rates different from residential rates?
Yes — buy-to-let interest only rates are typically higher than residential rates, often by 0.5–1.5%, because BTL lending carries more risk for lenders. Residential interest only mortgages, with their stricter criteria and lower LTV requirements, often carry rates comparable to or even lower than standard repayment products. Buy-to-let rates tend to be higher because:
- BTL mortgages are considered higher risk due to potential void periods (when the property is empty and generating no rental income)
- BTL borrowers typically use higher LTVs (up to 75%), which means more risk for the lender
- Regulatory capital requirements mean lenders must hold more capital against BTL lending
- BTL mortgage costs include additional fees such as higher arrangement fees and specialist valuation charges
For a detailed look at BTL interest only mortgages, read our guide to interest only buy-to-let mortgages.
How can you get the best interest only mortgage rate?
- 01
Maximise your deposit or equity
The lower your LTV, the better the rate. If you can put down a larger deposit or have built up significant equity, you will access more competitive products.
- 02
Compare the total cost, not just the rate
A low headline rate with a £2,000 arrangement fee may cost more overall than a slightly higher rate with no fee. Calculate the total cost over the product period.
- 03
Use a whole-of-market broker
Interest only mortgages are a specialist area with fewer lenders. A broker with access to the whole market can identify deals you would not find on the high street.
- 04
Lock in before rates rise
Most mortgage offers are valid for three to six months. If you expect rates to increase, securing an offer early gives you protection while you complete your purchase or remortgage.
- 05
Review your deal regularly
When your fixed or introductory period ends, you will revert to the lender's standard variable rate, which is almost always higher. Remortgage before this happens to secure a new competitive deal.
Use our mortgage calculator to compare monthly payments at different rates and see how even a small difference in rate affects your outgoings on an interest only basis.
What happens when your interest only rate deal ends?
Your mortgage will revert to the lender's standard variable rate (SVR), which is almost always significantly higher — and on an interest only mortgage, this hits harder because the full balance remains unchanged. On an interest only mortgage, where every rate change directly impacts your monthly payment with no capital reduction to soften the blow, this can mean a sharp and unwelcome increase in your outgoings.
For example, if your £300,000 interest only mortgage reverts from a 4.5% fixed rate to an SVR of 7.5%, your monthly payment would jump from £1,125 to £1,875 — an increase of £750 per month. This is why it is essential to remortgage onto a new deal before your current one expires.
If your mortgage is approaching the end of its overall term rather than just a product deal, you have different considerations. Read our guide to what happens when your interest only mortgage ends for more information.
Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it. Always compare the total cost of borrowing, including fees, when choosing a mortgage product.
- Interest only rates are generally the same as repayment rates from the same lender at the same LTV.
- Residential interest only borrowers at 50% LTV or below often access the best rate tiers available.
- Buy-to-let interest only rates are typically higher, reflecting the additional risk and higher LTVs.
- A 1% rate rise on a £300,000 interest only mortgage adds £250 per month — rate choice matters.
- Always remortgage before your deal expires to avoid reverting to the lender's much higher SVR.