Interest-only for first-time buyers: lower payments do not mean a smaller debt

The FCA’s consultation, CP26/18, included proposals covering interest-only and part-and-part mortgages. Part-and-part simply means that one portion of the loan is on a repayment basis while another is interest-only.

An opinion article in The Intermediary explored whether greater flexibility could help some first-time buyers whose income is likely to rise. That is a useful discussion, but there is an important distinction: the FCA has consulted on changes; it has not yet confirmed these proposals as new rules.

The consultation closed on 28 July 2026. The FCA says it expects to publish its response and a policy statement in the second half of 2026.

What is an interest-only mortgage?

With a normal repayment mortgage, each monthly payment covers the interest charged and pays off some of the money borrowed. Provided the payments are maintained, the balance should be cleared by the end of the term.

With an interest-only mortgage, the monthly payment covers the interest but does not normally reduce the original capital.

If you borrow £200,000 on an interest-only basis and make only the required interest payments, you could still owe £200,000 when the mortgage term ends. You therefore need a separate, credible way to repay that balance.

The attraction is obvious: because you are not paying down the capital each month, the initial monthly payment is lower than it would be on an equivalent repayment mortgage.

But lower monthly payments do not mean the home costs less. You keep paying interest on a balance that is not reducing, and you still have to repay the capital eventually.

Why is the FCA considering change?

Mortgage customers do not all follow the same career or income pattern. Someone finishing professional training may expect their earnings to increase. A household may be temporarily relying on one income. A self-employed customer’s income may be strong but irregular.

The FCA says some existing rules might stop creditworthy customers from accessing mortgages that suit their circumstances. Its proposals are designed to give lenders more flexibility while keeping affordability checks in place.

One proposal would make it easier in some circumstances to treat a planned conversion from interest-only to repayment as a credible repayment strategy. The consultation also proposed different requirements depending on how much of the property’s value was covered by the interest-only element.

Those details matter to lenders and advisers, but the practical point for customers is simpler: removing or changing a regulatory requirement would not remove the debt.

When might interest-only make sense?

Interest-only could potentially work as a temporary stepping stone for a customer with a strong and realistic reason to expect their finances to change.

That might include a professional qualification nearing completion, a planned return to work or another identifiable event that should support moving onto repayment. Even then, expected income is not guaranteed income.

A sound plan needs more than “we should earn more later” or “the house should rise in value”. MoneyHelper’s current guidance says borrowers are responsible for maintaining a credible repayment plan and cannot simply rely on a hoped-for inheritance, bonus or increase in property prices.

For many first-time buyers, a repayment mortgage over a longer term may be the more straightforward alternative. That can reduce the monthly payment while still paying down the debt, although a longer term normally increases the total interest paid.

Part-and-part can provide another middle ground. Some capital is repaid each month, while the interest-only portion keeps the payment lower than a fully repayment mortgage. The remaining interest-only balance still needs its own repayment plan.

The risks to think about now

A plan to switch onto repayment later could be affected by a lower-than-expected salary, illness, changes in family circumstances or higher living costs.

Remortgaging is not guaranteed either. Future lender criteria, interest rates, affordability checks and the property’s value will all matter.

This is particularly important with a small deposit. If house prices fall or remain flat while the mortgage balance stays unchanged, you may have limited equity. Equity is the part of the property you own after deducting the mortgage debt. Less equity can reduce the mortgage options available when your initial deal ends.

What this means for you

If you are a first-time buyer, do not assume that interest-only mortgages have suddenly become widely available. The FCA proposals are still being considered, and individual lenders decide which products they offer and who qualifies.

If interest-only or part-and-part is suggested, ask to see the position in pounds, not just percentages:

- What will the monthly payment be now?

- What mortgage balance will remain after two, five and ten years?

- How and when will the interest-only capital be repaid?

- What happens if your expected income increase does not happen?

- How does it compare with a longer-term repayment mortgage?

- What would the total interest cost be under each option?

Three practical takeaways

1. Interest-only reduces the payment today, not the amount borrowed.

2. FCA proposals are not confirmed rules or a promise that lenders will offer these mortgages.

3. Test the repayment plan against what happens if income, rates or property values do not behave as expected.

The right mortgage structure depends on more than the lowest initial payment. My Simple Mortgage can help you compare repayment, interest-only and part-and-part options clearly, including what the balance and costs could look like over time.

This article provides general information only and is not personal mortgage advice. Your home may be repossessed if you do not keep up repayments on your mortgage.