First-time buyers offered interest-only mortgages: Is it a bad idea?
Lender Gen H claims it will help those who want to escape the rental market
By ED MAGNUS
Updated: 07:00 BST, 24 June 2025
First-time buyers with at least a 20 per cent deposit can now buy with an interest-only mortgage.
The lender, Gen H, claims it will help make home ownership more affordable, and help those who want to to escape the rental market.
However, some mortgage experts have voiced concerns about whether borrowers will have the financial discipline to come up with a repayment plan.
We explain how the mortgages work, run the rule over the rates and ask mortgage experts what borrowers need to look out for.
Proposition: Gen H has launched new interest-only mortgages aimed at first-time buyers, home movers and those remortgaging
What is an interest-only mortgage?
As the name suggests, home owners only pay the interest each month, with the loan amount remaining the same.
This differs from a typical repayment mortgage where the borrower pays back a part of the loan, as well as the interest, each month until they eventually pay off the mortgage.
With interest-only, the monthly payments will be lower – but the full amount borrowed will still need to be repaid.
Borrowers can do this during the term by making voluntary overpayments, subject to certain limits.
But if they don’t, the whole amount will need to be repaid at the end of the mortgage term. If the borrower doesn’t have the means to do this, it often means they must sell the home to pay back the bank.
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How popular are they?
Interest-only mortgages were popular among home buyers in the 1980s and 1990s, often sold alongside endowments – investment schemes which promised to grow enough to pay back the loan by the end of the term.
But their popularity waned as some of these endowments failed to make the promised returns, leaving borrowers in the lurch.
The rules on interest-only mortgages were then tightened in the aftermath of the financial crisis.
Today they are mostly used by buy-to-let landlords, as they allow them to keep hold of cash which they can invest in growing their portfolio.
Another group which often makes use of them is wealthy and financially savvy borrowers – for example those who get big bonuses, and want to be able to pay off their mortgage in large but irregular chunks.
Lower repayments: With an interest-only mortgage, home buyers will only pay the interest each month, with the loan amount remaining the same
Gen H’s move comes at a time when interest only mortgages for home buyers are very much in retreat.
The total interest-only mortgage stock fell by 17 per cent in 2024 and has reduced by 78 per cent in number since 2012, according to data last week from UK Finance.
There were 541,000 pure interest-only homeowner mortgages outstanding at the end of 2024, 18.5 per cent fewer than in 2023.
Who is Gen H’s product for?
The lender says the new mortgage is aimed at professionals and self-employed first-time buyers who would benefit from lower monthly payments, but also have a solid repayment strategy for the loan.
Pete Dockar, chief commercial officer at Gen H says that, in this scenario, an interest only mortgage can create the equivalent of a 10-15 per cent boost in affordability over a 30-year term.
This, he says, can be the difference between continuing to rent and owning a home of your own.
‘Housing affordability challenges are here to stay, and helping everyone access homeownership and build long term wealth requires us to consider how familiar tools can be used in new ways,’ said Dockar.
Can I pay builder in cash and could my bank stop me taking out £40,000 over eight weeks?
‘Interest only is a perfect example – it has long been considered a tool for the rich, but as one of the UK’s only lenders creating truly incremental homeowners, we believe it can support first-time buyers as well.
‘An interest only mortgage can spell the difference between staying locked in the rental cycle or accessing homeownership and building meaningful wealth over time.’
Who can apply and what are the interest rates?
Buyers will need at least a 20 per cent deposit and a minimum household income of £50,000 per year to be eligible.
Rates will vary depending on the size of their deposit.
Those buying with a 20 per cent deposit can secure a five-year fix at 5.38 per cent, or a two-year fix at 5.44 per cent – both come with a £1,499 fee.
Someone securing the five-year deal at 5.38 per cent rate could expect to pay £896 per month.
These rates are more expensive than those that would be offered on an interest-bearing mortgage. The cheapest two-year fix for someone with a 20 per cent deposit is currently around 4.15 per cent.
With Gen H, someone buying with a 40 per cent deposit can secure a two-year fix at 5.09 per cent or a five-year fix at 5.33 per cent – both with a £1,499 product fee.
On a 5.09 per cent, £200,000 interest only mortgage, someone could expect to pay £848 a month.
On the ladder: Gen H claims its new mortgages can help those who otherwise would remain in the rental market and be unable to buy their first home
Gen H says the term can go to the eldest borrower’s 75th birthday or retirement, whichever is earlier.
Like with any normal interest-only mortgage, borrowers will need to confirm how they intend to pay off the loan at the end of the term.
Selling the property in the future is an acceptable reason. It can also come from the sale of other properties, pensions, investments and endowments – but proof of funds will be required in each case.
Is it a good option for first-time buyers?
Interest-only mortgages are often considered to be best-suited to financially savvy and experienced borrowers, who have a plan to pay off the debt.
Gen H, like most mortgage lenders, allows borrowers to make overpayments up to 10 per cent of the total mortgage amount each year without incurring penalty charges.
The concern will be whether buyers will have the financial discipline to make overpayments.
There is also a case that borrowers won’t be that much worse off by opting for a repayment mortgage with a lower rate.
Depending on the mortgage term, borrowers could find they are actually paying more each month.
For example, the lowest two-year fixed rate mortgage for someone buying with a 20 per cent deposit is 4.14 per cent, with a £1,495 fee, from the Bank of Ireland.
If someone fixed a £200,000 mortgage on this deal on a repayment basis over a 35- year term they could expect to pay £902 a month.
Meanwhile, a £200,000 interest only mortgage on Gen H’s two-year fixed rate of 5.44 per cent would cost £907 a month.
What do the experts say?
Mortgage brokers and financial experts are divided over Gen H’s interest-only proposition.
Simon Bridgland, a broker at at Charwin Private Clients thinks Gen H’s proposition could be bad news
Ross Lacey, director and independent financial adviser at Fairview Financial Management says: ‘We think interest-only certainly has a place in the residential mortgage market.
‘We deal with many clients who already qualify for interest-only mortgages given their level of earnings and the lower loan-to-value borrowing they are looking for.
‘We’re in a different world now. Interest-only repayment vehicles and the assessment of them are much more stringent and realistic compared with days gone by when an endowment with an unrealistically high maturity projection was relied on.’
However, Simon Bridgland, a broker at Charwin Private Clients is concerned that it could turn into a future horror story.
‘Whilst in theory interest-only is a super affordable option for home buyers, users should walk into it with a little fear and trepidation,’ he warns.
‘History books are still being written about the very real tale of homeowners close to or at the end of the mortgage term with no viable option of loan repayment.
‘Things that are totally out of the borrowers control will trash career plans and incomes intended for long term repayment strategies.
‘Gen H will need a very tight leash on things if it isn’t to turn into a future horror story.’
Best mortgage rates and how to find them
Mortgage rates have risen substantially over recent years, meaning that those remortgaging or buying a home face higher costs.
That makes it even more important to search out the best possible rate for you and get good mortgage advice, whether you are a first-time buyer, home owner or buy-to-let landlord.
Quick mortgage finder links with This is Money’s partner L&C
To help our readers find the best mortgage, This is Money has partnered with the UK’s leading fee-free broker L&C.
This is Money and L&C’s mortgage calculator can let you compare deals to see which ones suit your home’s value and level of deposit.
You can compare fixed rate lengths, from two-year fixes, to five-year fixes and ten-year fixes.
If you’re ready to find your next mortgage, why not use This is Money and L&C’s online Mortgage Finder. It will search 1,000’s of deals from more than 90 different lenders to discover the best deal for you.
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Mortgage service provided by London & Country Mortgages (L&C), which is authorised and regulated by the Financial Conduct Authority (registered number: 143002). The FCA does not regulate most Buy to Let mortgages. Your home or property may be repossessed if you do not keep up repayments on your mortgage.
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First-time buyers offered interest-only mortgages: Is it a bad idea?
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