What is an interest-only mortgage?

An interest-only mortgage is when your monthly repayments only repay the interest on your loan, not the loan itself. We look at what an interest-only mortgage is and how it works.

As an interest-only mortgage is a type of mortgage that only covers interest, the loan isn’t repaid over time and needs to be repaid in full by the end of the mortgage term or sooner.
In a traditional loan, borrowers gradually repay the principal (the money borrowed) and the interest (the amount it costs to borrow that money).

This is slightly different in an interest-only mortgage. After a borrower takes out an interest-only loan, they are allotted an introductory grace period, during which they do not have to make payments on the principal of the loan. Instead, they only make interest payments throughout that set period.

Borrowers must then repay the loan in full, whether by lump sum or gradual monthly payments when that set period is over.

Interest-only mortgages are primarily designed for borrowers who stand to make a profit from their loan-funded purchase. For example, if you flip houses, you might take out an interest-only loan to purchase a fixer-upper, since you plan to sell the house at a higher price later. By doing so, you postpone your principal payments until you have sold the renovated house, freeing up front-end cash to make said renovations.

Several of CNBC Select’s top-ranked mortgage lenders offer interest-only mortgages, including Chase Bank and PNC Bank.

CNBC Select found PNC Bank to be the best lender for flexible loan options. PNC Bank offers interest-only mortgages to eligible borrowers with a minimum credit score of 620 and a minimum down payment of 3%. Further, the national lender offers a plethora of tailored mortgage options as well as online and in-person application processes