The difference between repayment and interest only mortgages
A repayment mortgage is one where your monthly payment covers the interest charged by your lender as well as repaying the original loan. This means your debt is gradually reduced over the term of the mortgage and at the end you will owe nothing. An interest only mortgage is one where your monthly payment only covers the interest charged by your lender. Because you don't pay anything off the loan, at the end of the term you will still owe the full amount.
Borrowers with interest only mortgages will usually set up some kind of investment based mortgage repayment product like an ISA or an endowment (at an additional monthly cost) designed to repay the whole debt at the end of it's term. The figures produced by this calculator do not include the cost of insurance or any investment based mortgage repayment vehicle.
Are interest only mortgages still available?
It is common for nearly all Buy to Let mortgages to be advanced on an interest only basis, but what about residential mortgages? The recent Mortgage Market Review (MMR) was a comprehensive review of the mortgage market, which started with a Discussion Paper in 2009 and culminated in a Policy Statement and final rules in October 2012. According to the Financial Conduct Authority (FCA) website:
"Lenders will still be allowed to grant interest-only loans, but only where there is a credible strategy for repaying the capital."
This means that yes, interest only mortgages are still available, but the lender must be convinced that whatever repayment vehicle you have in place (such as an endowment, pension or ISA) will be enough to repay the loan at the end of the term. You should therefore consider the possibility that the total monthly cost of your repayment vehicle added to the interest only mortgage payment will be about the same, if not more than, the monthly cost for a repayment mortgage. Further information on the guidance for lenders regarding interest only mortgages is also available on the FCA Handbook website here.