Extending an Interest-Only Mortgage Term

Interest-only mortgages can be attractive to some as the monthly payments are usually cheaper than capital repayment. However, at the end of the term, you still owe 100% of the mortgage amount. So, a plan is needed to repay the loan at this point and one option is to extend the term,  delaying when the final amount is due.

This article examines why you might want to consider extending versus other choices available to you.  Additionally, we investigate which lenders offer term extensions, what their criteria is and what your new repayments could look like if you do extend.

Can you extend an interest-only mortgage term?

Yes, it is possible. But, extending the term with your current provider is by no means guaranteed. Interest-only mortgages are riskier than conventional ones, making applying for an extension more difficult at times. Extensions are always at the discretion of the lender.

The key thing to remember is to look at your options as soon as possible. If you put off trying to extend your mortgage, you may find you have fewer choices available to you in the future and with less favourable terms.

Extending the term on an interest-only mortgage gives you more time to raise the funds needed to pay off the loan in full. However, it does mean that you pay that much more servicing the debt overall through more interest payments.

A broker who specialises in interest-only home loans can help you with extending your mortgage term and look at all the other options available so you can make a more informed decision.

Possible term lengths

Interest-only mortgages usually range between 5 and 25 years. However, like conventional mortgages, you may find lenders that are happy to go to 30 years. Some may even consider stretching to 35-40 years.

The longer terms, however, are less common to see. The stronger your application (bolstered by hitting many of a provider’s eligibility criteria) may give you more of a chance of extending your mortgage for longer – should you need to.

Is extending a mortgage term the same as remortgaging?

No, not really.  Applying for an extension on your interest-only mortgage simply means having longer until you have to pay the loan off in full.

Remortgaging is when you apply for another mortgage product, usually because your fixed-rate period ends or you wish to raise more capital by releasing equity from your property’s value. Often, applicants try to apply for a remortgage to obtain a lower interest rate.

Having a lower rate reduces your monthly payments, thus freeing up more cash for you to save. As a result, at the end of the mortgage term, you will have more equity to pay off the loan. This could be a suitable alternative to extending your mortgage term, depending on your circumstances and the new rates you are eligible for.

Why you might consider doing this

There are a number of situations where extending the term of your interest-only mortgage is an appropriate course of action. There are others where it may be better for you to choose another repayment plan.

One scenario where extending the term of your loan is suitable is if you do have a viable repayment strategy. It could be that you are able to pay off your mortgage at the end of the new term because:

• Your income could be increasing in that time,
• you may be selling another property you own (or even the property you want to extend the mortgage on),
• or your other outgoings may be reduced, so you have more cash to pay off the loan.

It is important to consider the implications of extending the loan before doing so. The disadvantages to an extension are:

• You are making your mortgage more expensive over time. While you may feel there are short term financial benefits, you will likely pay more overall.
• You are building the amount of equity or value you have in your home more slowly. With interest-only mortgages, you are dependent on house prices to increase the equity in your property. If you switched to a repayment mortgage, you will be repaying the principal amount of capital each month and thus increasing your equity value.

How to extend an interest-only mortgage

If you are still keen to extend your interest-only mortgage, there are a number of simple steps to follow to put your application on the best footing.

Step 1: Check your current mortgage and evaluate your current financial situation

Review the outstanding balance on your mortgage and your current rate in addition to the date you need to repay in full. Decide whether you are able to pay off the loan as you had planned and, if not, how far short you are of doing so. Determine whether it is possible to pay off some of it, at least, if you cannot repay in full at the end of the term.

Step 2: Run a credit check

This is a good time to run a credit check on yourself to see how strong your extension application can be. While bad credit marks on your credit report will not always be a dealbreaker with lenders for extensions, it’s good to know what your situation is. You can either take steps to remove erroneous black marks on your history or at least know where you are credit-wise for your application.

Step 3: Speak with a specialist broker

Speaking with an interest-only mortgage specialist is highly recommended at this juncture. They have in-depth knowledge of the market and what providers are looking for on extension applications. They will know whether your current provider will accept an extension application from you or what you can do to improve your chances of approval. They can even help you secure an extension with a lower rate if they think it is possible.

Once you have spoken with a broker and determined the best course of action, it is a good idea to implement your plan as soon as possible. If you get in touch we can arrange for an advisor we work with to contact you directly for a free, no obligation chat.

Alternatives to consider

If you feel that the disadvantages to extending an interest-only mortgage are, on balance, too detrimental, there are other options available to you:

Downsizing

Selling your home and buying a cheaper one is a way to free up equity that you have built up in your property. You can use that equity to pay off some (or all) of your mortgage at the end of the term. This may not be a desirable option for many, but it may stop your home from being repossessed if you cannot find another way to pay off the outstanding loan. Moving does come with many associated costs (like stamp duty, for example), which are key to consider when deciding whether this option is right for you.

Remortgage

If you do not want to sell your home, you could try to remortgage with another lender or onto a product with your existing lender at a lower rate. If you’re eligible, the lower rate will result in a lower repayment, which may mean you can start to overpay your mortgage, thus reducing the final balance. Alternatively, you could save the cash freed up to pay off as a lump sum at the end of the term.

Equity release

While extending your mortgage term is generally harder the older you are, you could become eligible for an equity release scheme . These products allow you to free up equity built up in your home plus you can still live in it. Crucially, they do not require monthly repayments. Instead, the loan is repaid when you pass away or move into full-time care – allowing your home to be sold.

Retirement interest-only mortgage

If eligible, you could switch your product to a retirement interest-only mortgage where you make repayments at a fixed rate. Importantly, there is no repayment deadline. The outstanding balance of the loan is repaid when you pass away or move into full-time care, and your property is sold.

What your new repayments will look like

Extending the term of your loan may affect your payment amount if your rate has changed or if you have switched to a principal repayment product. Our calculator will be able to help you forecast how much your new payments will be:

The calculator is set to repayment by default, but once you’ve entered your figures, you will have the option to change the tool to interest only to see how the results compare.

Which lenders offer term extensions?

Mortgage term extensions are always up to a lender’s discretion, so your current provider may consider your application if you already have an interest-only mortgage. Some lenders may be happy to extend for the longest period possible, others may only extend for a shorter time, while others may refuse outright.

For example, Penrith Building Society has been known to offer an interest-only mortgage with a maximum term of 35 years and no maximum age limit for the end of the mortgage term. If you have a mortgage with them, you may find they will consider extending your term to the maximum length.

Other examples of lenders who currently offer interest-only mortgages and their maximum term lengths and age limits are:

• Newbury Building Society (max term length: 35 years. Max age at end of term: 90 years)
• Live more (max term length: 50 years. Max age at end of term: none)
• The Loughborough Building Society (max term length: 35 years. Max age at end of term: none)
• Together (max term length: 40 years. Max age at end of term: 85 years)

Eligibility criteria

As with initial applications for an interest-only mortgage, different lenders have different criteria they want you to meet to be eligible for an extension. They will likely be:

Loan-to-value (LTV) ratios

The more equity you have built up in your property over the years (perhaps due to house price appreciation), the stronger your application. With more equity, you will be seen as lower risk, given that you could potentially pay off the loan by selling your home.

Affordability and final repayment

While you have already been approved for the mortgage, your current provider will still want to ensure that you can make the extension repayments. They’ll look at your income, therefore, as well as your income source.

At this point, they will also scrutinise your ability to repay the loan at the end of the proposed new term. Lenders will want to see that you have, or will have, a plan to settle the debt when the new extended term comes to an end. This could be a sale of another property, taking a lump sum from your pension, using other savings or selling other assets.

Credit history

If you have a bad credit history, you are perceived to be a higher risk than those with a good credit score. As a result, you may find that some providers are less likely to approve your term extension application if you have a poorer score.

Age

The older you are, the less likely you are to be eligible for a mortgage extension – particularly if you are on an interest-only product. Your age may not be a dealbreaker if other parts of your application are strong enough for specific lenders. However, ordinarily, lenders have an age limit of 75 for their products, though some do go up to 85.

Speak to an interest-only mortgage specialist

Extending your interest-only mortgage may be an appropriate course of action for your circumstances, but there are many instances where it won’t be. Plus, it is not guaranteed that your provider will automatically approve your extension application.

Speaking with an interest-only mortgage specialist would be extremely beneficial as they will know what your options are, if extending the term of your mortgage is a good idea for you, and even if it’s possible to reduce your current rate.

Our no-obligation, free broker matching service will connect you with a specialist with in-depth knowledge of the entire market – meaning you are given the best advice possible. Call us on 0808 189 2301 or make an enquiry so we can put you in touch with an expert today for a free, no-obligation chat.