First-time buyers now have the option to purchase a home using an interest-only mortgage, provided they can put down a deposit of at least 20 per cent. This development is aimed at making the path to home ownership a little more accessible.

The mortgage product is being offered by Gen H, a lender that claims this approach will help reduce the financial burden for aspiring homeowners. Their intention is to assist more people in moving out of the rental market and into properties they can eventually own.

An interest-only mortgage allows buyers to pay only the interest on the loan for a set period—typically meaning lower monthly payments. However, the borrower is still responsible for repaying the full loan amount at the end of the term.

While the idea may sound appealing, it has raised some eyebrows in the mortgage industry. Several experts have expressed concerns about whether first-time buyers will have the long-term financial discipline to put aside funds for eventual repayment.

The risk is that without a clear and structured repayment strategy, buyers could find themselves unable to clear the outstanding debt when the interest-only period ends.

Gen H argues that interest-only loans offer greater flexibility, especially during the early years of homeownership when financial commitments are often higher. This could be useful for buyers who expect their incomes to increase over time.

However, the success of this mortgage model relies heavily on borrowers proactively saving or investing during the interest-only period. Without doing so, they may be forced to sell the property or refinance to cover the debt.

Critics worry that this could lead to a repeat of past issues seen in the housing market, where interest-only mortgages caused financial strain for homeowners who didn’t plan ahead.

To make an informed decision, it’s vital for potential buyers to understand how interest-only mortgages work. They should also seek independent advice to ensure the product suits their circumstances.

Interest rates on these mortgages may be slightly higher compared to standard repayment loans. Buyers should factor this into their budgeting, along with the need to save for future repayment.

Experts also recommend considering job stability, future income potential, and lifestyle goals when evaluating whether this type of loan is suitable.

While Gen H’s offering may provide a stepping stone for some, it isn’t a one-size-fits-all solution. Buyers need to be realistic about their ability to manage the long-term financial responsibility.

The key takeaway is that interest-only mortgages can work if used wisely and with a solid plan in place. But without preparation, they may lead to financial complications down the line.

As the housing market continues to evolve, it’s clear that lenders are looking for new ways to help people onto the property ladder. This product could be helpful for some but should be approached with care.

Before signing any agreement, potential homeowners should take time to understand all terms, including what happens at the end of the interest-only period.

In summary, while the interest-only route may offer short-term relief, it’s essential to ensure it aligns with long-term financial goals. For many, a traditional repayment mortgage may still offer more security.

What is an interest-only mortgage?  

As the term suggests, an interest-only mortgage means that the homeowner pays only the interest each month, while the actual loan amount remains unchanged.

This setup is different from a standard repayment mortgage, where borrowers gradually pay off both the interest and the capital over time, eventually clearing the full loan.

With an interest-only arrangement, the monthly payments tend to be lower. However, the original amount borrowed still needs to be repaid in full at some point.

Borrowers can choose to make voluntary overpayments during the mortgage term, which can reduce the overall balance. These overpayments are usually subject to limits set by the lender.

If overpayments aren’t made, the full loan amount must be repaid when the mortgage term ends. Without the funds to do this, many borrowers may have no choice but to sell their property to repay the debt.

So how popular are interest-only mortgages today?

Back in the 1980s and 1990s, these mortgages were quite popular among homebuyers. They were often paired with endowment policies—investment plans that aimed to grow enough over time to repay the loan.

However, many of these endowments failed to meet their targets, leaving homeowners short and unable to cover the debt.

Following the financial crisis, tighter regulations were introduced to help prevent borrowers from falling into this kind of difficulty.

These days, interest-only mortgages are more commonly used by buy-to-let landlords. This type of mortgage allows them to keep more of their cash available for expanding their property portfolio.

They’re also a favoured option for wealthier borrowers—particularly those who receive large, irregular bonuses and prefer the flexibility of making lump sum payments when it suits them.

Despite this, interest-only deals aimed at homebuyers have been steadily declining.

Recent figures from UK Finance show that the total stock of interest-only mortgages dropped by 17 per cent in 2024. In fact, since 2012, their overall number has fallen by 78 per cent.

By the end of 2024, there were approximately 541,000 outstanding interest-only homeowner mortgages—18.5 per cent fewer than the year before.

Who is Gen H’s product for?  

The lender has introduced a new mortgage product designed specifically for professionals and self-employed first-time buyers. It’s aimed at those who could benefit from reduced monthly payments but who also have a reliable plan in place for eventually repaying the loan.

According to Pete Dockar, Chief Commercial Officer at Gen H, this type of mortgage could increase a buyer’s affordability by around 10 to 15 per cent over a 30-year period.

He explains that this potential uplift in affordability could make all the difference—possibly turning the dream of owning a home into reality for those currently stuck renting.

Dockar highlights the ongoing issue of housing affordability in the UK, noting that long-term solutions must involve rethinking how existing financial tools are used.

He believes that interest-only mortgages, often seen as an option reserved for the wealthy, have potential beyond their traditional audience.

As one of the few lenders in the UK actively working to support people into homeownership, Gen H argues that this type of loan could offer real support to first-time buyers too.

Dockar adds that interest-only mortgages might be the key to helping more people break out of the rental cycle and start building long-term financial security through homeownership

Who can apply and what are the interest rates? 

To qualify for this mortgage deal, buyers must have a deposit of at least 20 per cent and a household income of no less than £50,000 per year.

The interest rates on offer will depend on the size of the deposit a buyer puts down.

For those contributing a 20 per cent deposit, Gen H offers a five-year fixed rate at 5.38 per cent or a two-year fixed rate at 5.44 per cent. Both options come with a product fee of £1,499.

A borrower opting for the five-year deal at 5.38 per cent would be looking at monthly payments of approximately £896.

However, it’s worth noting that these rates are higher than what’s currently available for standard repayment mortgages. For example, the most competitive two-year fix for a buyer with a 20 per cent deposit sits at around 4.15 per cent.

Buyers who can afford to put down a larger deposit of 40 per cent may benefit from more favourable rates with Gen H. These include a two-year fix at 5.09 per cent or a five-year fix at 5.33 per cent—both carrying the same £1,499 fee.

On an interest-only mortgage of £200,000 at the 5.09 per cent rate, a buyer could expect to pay around £848 per month.

The loan term is structured to end either when the eldest borrower reaches the age of 75 or upon their retirement—whichever comes first.

As with all interest-only mortgages, applicants will need to clearly outline how they plan to repay the loan once the term comes to an end.

Selling the property to clear the balance is an acceptable option. Other repayment sources could include the sale of additional properties, pension income, investment returns or endowment policies. Regardless of the method, evidence of available funds will be required by the lender.

Is it a good option for first-time buyers?

Interest-only mortgages are typically seen as more suitable for financially knowledgeable and experienced borrowers—those who already have a clear strategy for repaying the loan at the end of the term.

Like many lenders, Gen H allows customers to make overpayments of up to 10 per cent of the mortgage balance each year without facing any penalties.

However, there is concern over whether buyers will have the financial discipline to actually make those extra payments regularly.

Some experts argue that borrowers may not necessarily be better off with an interest-only mortgage. Choosing a traditional repayment mortgage with a lower interest rate could prove more cost-effective in the long run.

In fact, depending on the length of the mortgage term, monthly payments on a repayment mortgage might end up being quite similar—or even cheaper—than those on an interest-only deal.

Take this example: the Bank of Ireland currently offers a two-year fixed rate at 4.14 per cent, with a £1,495 fee, for buyers with a 20 per cent deposit.

A borrower taking out a £200,000 repayment mortgage on that deal over 35 years would pay around £902 a month.

In comparison, a £200,000 interest-only mortgage on Gen H’s two-year fixed rate of 5.44 per cent would result in monthly payments of about £907.

What do the experts say?  

There is currently a split in opinion among mortgage brokers and financial advisers regarding Gen H’s new interest-only mortgage offering.

Ross Lacey, director and independent financial adviser at Fairview Financial Management, believes that interest-only mortgages still have a role to play in today’s residential market.

He explains that many of their clients already meet the criteria for interest-only lending due to their strong incomes and lower loan-to-value borrowing requirements.

Lacey also points out that the mortgage landscape has changed considerably. Unlike in the past—when overly optimistic endowment projections were often relied upon—modern interest-only repayment plans are now assessed with far greater caution and realism.

However, not everyone is convinced.

Simon Bridgland, a mortgage broker at Charwin Private Clients, voices serious concerns about the potential risks of this kind of lending.

He acknowledges that interest-only can be an attractive and seemingly affordable route into homeownership. Still, he cautions that borrowers should approach it with a degree of caution and awareness.

Bridgland highlights past instances where homeowners reached the end of their mortgage terms without any viable means of repaying the loan. These cautionary tales, he says, are still playing out.

He also warns that even carefully planned repayment strategies can be derailed by events outside a borrower’s control—such as career disruptions or unforeseen financial hardship.

In his view, Gen H must implement strict controls and oversight to avoid repeating past mistakes. Without this, the lender could risk turning today’s solution into tomorrow’s mortgage crisis.

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