Trends have a way of coming back around again years later. From vinyl records to vintage denim, trends of the past were often popular for a reason, and new generations can rediscover them decades later with a fresh new spin. This isn’t just true of music and clothes but extends into the world of finance, too.
Today, interest-only mortgages are re-emerging as a viable option in a modern housing market. While they were once approached with caution, particularly in the years following the 2008 financial crisis, recent developments in product design and regulation have made them more accessible and better understood.
As the financial industry has recovered in the years since the crash, interest-only mortgages have since been largely confined to the buy-to-let market. As of 2024, interest-only mortgages made up just 4.5% of the total number of regulated mortgages in the UK, compared to 39% in 2007. But times are changing, and today there’s a steady uptick in interest-only mortgages, as regulators, homebuyers, and the property market as a whole see them as a viable way to promote sustainable homeownership. Indeed, Pepper Money has seen a 44% increase year-on-year in the number of interest-only mortgages, as homebuyers look to lower their monthly payments and benefit from increased flexibility, while still being able to realise their home ownership ambitions.
Why customers are opting for interest-only
Interest-only mortgages can enable homeowners to have lower monthly payments by paying just the interest, not the loan capital. This makes them ideal for some buyers who are often overlooked by high street lenders, including those with irregular income patterns like self-employed individuals or commission-based workers. Pepper Money’s data shows that in 2025 self-employed workers made up 40% of all applicants for an interest-only mortgage, up from 34% the year before, demonstrating the vital role these products play in allowing these customers to better manage their cash flow over a long period of time.
Freeing up additional funds each month also gives homeowners strategic flexibility to deploy these funds elsewhere, easing short-term financial pressures and enabling the flexibility to invest any surplus when a long-term repayment plan has already been established.
This could also include investing in the next generation, with the shift toward multigenerational living arrangements as the average age of the first-time buyer continues to rise. Many grandparents are lowering the cost of their monthly mortgage payments to prolong their stay in the family home, enabling them to support their children with childcare and finances.
Of course, lessons have been learned from the 2008 financial crash, and at Pepper Money we take our commitment to responsible lending seriously. Our interest-only mortgage products require at least 40% deposit or existing equity to ensure that buyers are protected from even the very worst house price shifts. Along with our core mission to support customers to rebuild their financial resilience and ultimately re-enter the high street, by establishing good habits with Pepper, they will build significant equity and then have an opportunity to access the most favourable rates when they return to a repayment mortgage.
Supporting homeownership aspirations
In response to growing interest in the market, the Financial Conduct Authority (FCA) is examining its current guidance to determine how interest-only mortgages can be responsibly used to support homeownership. Learning from the past, the FCA understands that with the right safeguards in place, interest-only mortgages could support prospective buyers who currently struggle to afford a repayment mortgage on their journey to homeownership.
Signatories to the Government’s 2023 Mortgage Charter have already committed to permitting customers to move to interest-only payment for up to 6 months in times where additional financial flexibility is required. This move by the FCA is a breath of fresh air in a lending environment that otherwise risks not adapting to an evolving housing and financial market. Our own data indicates that interest in interest-only mortgages is largely focused on London and the Home Counties, where 45% of interest-only applicants currently reside. This speaks to the huge housing pressures this area faces.
Brokers know that complex financial histories can be found amongst all ages and professions, and at Pepper Money, we’re proud to support individuals from all backgrounds and circumstances on their path to homeownership. Nearly half (45%) of Pepper Money’s interest-only mortgage applicants are considered middle class, according to CACI Acorn segmentation, and with interest-only property prices on average 23% higher than those on repayment mortgages, this highlights how these products are particularly well-suited to our more affluent borrowers who value flexibility in managing their cash flow and long-term financial planning.
Within the current economic environment, it is all the more important that brokers empower their customers with a human approach to lending, taking the time to understand borrowers’ unique circumstances and finding the right product to fit their current affordability and flexibility needs. Pepper Money’s mortgages are underwritten by people, not computer software, which means we can ensure fairer decisions for all customers, and our broad product offering is designed to ensure individuals with more complex financial circumstances have access to the right type of lending.
An upward trend
A refreshed approach to interest-only certainly seems here to stay, and the specialist lending market is here to support brokers secure the right product for their customers. In the right circumstances, an interest-only mortgage can be a valuable tool for the right borrower, offering flexibility and certainty. As the property market adapts to new economic realities and affordability challenges persist, these products, when underpinned by robust lending standards, could play a pivotal role in increasing access to homeownership. With careful oversight and a human approach to lending, interest-only mortgages can support a more inclusive property market.
