Around the globe, the need for additional housing, due to the increase in world population, has led to the exploration of more cost effective and environmentally friendly forms of construction. Out of many technologies found, mortar-free interlocked masonry systems were developed to eliminate the deficiency of traditional masonry. For such systems against earthquakes, lateral resistance can be enhanced with plaster. But there is a need to further improve the performance of plaster in mortar-free interlocking walls for better ductility. The objective of this study is to develop nonlinear finite element (NLFE) models to explore the likely failure mechanism (e.g. bond failure) of such systems and to do parametric studies more cheaply than constructing many walls. Lateral failure load, load–displacement curves and crack patterns were compared with the experimental results. Parametric studies involving variation in block and plaster compressive strength and plaster thickness were undertaken using TNO DIANA NLFE models. A 150% increase in thickness of plaster only resulted in 28% increase in failure load, and column thickness can be reduced to theoretical 25 mm of blocks with 8 mm of plaster and yet exceed the lateral strength of a 150-mm-thick unplastered column. A cost analysis was also carried out, based on NLFE models, and showed that fibrous plastered column with 25-mm-thickness blocks gave equivalent performance to the 150-mm-thick unplastered column with 67% cost saving.