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Interest only mortgage help - what your options are if you’re struggling to pay it off

What should I do if I cannot repay my interest only mortgage. Get the right advice here!

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By Pete Mugleston   Mortgage Advisor

Last updated: 9th April 2019 *

The concept of an interest only mortgage is quite straightforward. Once you’ve agreed a mortgage with your lender you make monthly interest payments only and pay the loan amount off at the end of the term, as opposed to a repayment mortgage where payments are a combination of both capital and interest.

In theory this all sounds very simple. The reality, however, has proved to be very different with some borrowers struggling to meet their commitments to repay the capital amount, leaving them with an interest only mortgage shortfall

This article compiles the key information you need to know if you’re unable to pay off your interest only mortgage, including where to turn for the right advice.

For general information about interest only mortgages, see our guide here.

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I can’t repay my interest only mortgage. What can I do?

First of all, don’t panic. There may be interest only mortgage help available.

Whether you’re reaching the end of the term with a shortfall or struggling to keep up with the monthly interest payments, the expert brokers we work with are on hand to offer impartial advice and lay out all of the available options for you.

They might include…

  • Remortgaging to a new lender
  • Switching to a new deal with your current provider
  • Switching to a capital repayment mortgage
  • Releasing equity
  • Other alternatives

Read on for more information about the options we’ve outlined or make an enquiry to speak with one of the advisors we work with today.

What happens if you have an interest only mortgage shortfall?

The prospect of low monthly payments and the flexibility to choose from a range of investment vehicles offering the possibility of early repayment has, historically, made interest only mortgages very popular with borrowers in the past.

However, if the underlying investments associated with the repayment vehicle begins to under-perform, the borrower is left to consider a daunting question “What happens if I can’t pay off my interest only mortgage?”

If you reach the end of the original mortgage term with a capital shortfall the good news is you have a number of options available to you.

To find out more about the options outlined below make an enquiry and an expert can get in touch to give you some more details.

So, what are my interest only mortgage shortfall options?

They may include (but are not limited to) the following...

Remortgage with existing lender and extend the term

When a customer says to us “I can’t pay my interest only mortgage back”, the first thing most brokers would advise if they have a shortfall is to contact their existing lender and discuss their options with a view of extending the term. This could allow more time for your repayment vehicle to make up the shortfall.

However, this would require a fresh mortgage application process, which may prove challenging dependant on your age, and also whether the lender would consider an extension. Some lenders will not allow an extension to an interest only mortgage term under any circumstances whereas a few will consider extensions.

Remortgage to a lender that will allow a longer term / age

If your existing lender will not allow an extension to your term you need to consider remortgaging with a lender who will. In particular, you may need to look at this if your age at the end of the proposed new term falls outside your existing lender’s application criteria.

Whilst it’s true that, traditionally, most lenders have a cut off age of 70-75 for a mortgage term, some lenders will lend up to the age of 80 for interest only mortgages and a few now have no age limits at all.

If you get in touch we can make sure an expert will be able to provide you with the correct guidance in this area.

Remortgage and switch to repayment

If you reach the end of the term with an interest only mortgage shortfall, you may decide that enough is enough and any remortgage proposal should focus on a repayment mortgage option whereby you will know for sure that the balance will be repaid by the end of the term.

There should also be a greater degree of flexibility from lenders who may be more receptive to switching to repayment for the same reasons.

The one thing to be aware of if you decide to switch is the payments for a repayment mortgage may be higher as it will include both capital and interest elements.

Affordability may be a key factor here depending on how big the shortfall is from your interest only mortgage.

To understand all the differences between interest only and repayment mortgages it’s important you speak to an expert to assist you further before you make any decisions.

Sell your property

You may reach the conclusion that the best way to cover any shortfall is simply to place your house on the open market. This can place some borrowers in a difficult situation if, as in some cases, they can’t pay off their interest only mortgage any other way.

Selling your property then becomes the only viable option available to you. It can require going back to the drawing board, though, if any remaining equity after the balance is repaid leaves insufficient funds for a new residence. You may have no option other than to downsize or rent your next property.

Repay the loan with cash

If you’re sat on a pile of cash or if you’re able to call on financial assistance from a wealthy relative via an upcoming inheritance, for example, then this is definitely an option to cover your interest only mortgage shortfall. The reality is though, that this is an option unavailable for many.

Release equity

For the older borrower (typically over the age of 55) releasing equity from the property could be one of the interest only mortgage shortfall options. Whilst most lenders would require a minimum amount of equity in the property of £200,000 or more, some lenders are happy with only £150,000 and a few have no minimum equity requirement.

What happens if you’re unable to repay your interest only mortgage at the end of the term?

If you’ve exhausted all of the above options with none able to provide a remedy and you still cannot pay off your interest only mortgage then you need to take further steps as soon as possible.

Firstly, you need to contact your lender and discuss the situation with them. It will need to be a frank and honest discussion requesting their involvement to further explore with you any and all remaining alternatives.

What if there are no alternatives?

If, by the end of these discussions, there is still no way you can repay the capital then the lender is entitled to begin the process of repossessing your property. The lender must ensure they follow a strict protocol and be able to prove that repossession is absolutely the last resort having explored all other options.

If you find yourself in this position it is most likely your lender will try to be as flexible as possible before allowing things to reach this stage. Some lenders may simply allow payments to continue if the circumstances suit and a solution can be reached.

Whilst repossession can be traumatic for a borrower they can also be a difficult process for lenders and it is in both your interests to establish a resolution that avoids this action. If you get in touch we can make sure an expert will be able to provide you with the correct advice in this area.

What if I’ve fallen behind on payments for an interest only mortgage?

If you begin to fall behind with your payments the important thing is to keep in regular contact with your lender and ask them for help with your interest only mortgage. As with the repossession situation, it’s in their best interests to assist where they can. It may be possible for them to offer a payment holiday, which will ease the pressure on your financial position.

Government help may also be available

If you have an interest only mortgage you can’t pay back you should also consider the government’s support for mortgage interest scheme (SMI) which is offered as a loan by the government to borrowers who are experiencing financial difficulties. The loan is repaid usually when you sell your home. It cannot be used to pay for any outstanding mortgage arrears.

The government pays Support for Mortgage Interest at a set standard rate, rather than the rate at which the mortgage is at.

There’s also the option to sell your property and consider renting for a period until your finances return to a healthier position. Alternately, some lenders may consider letting the homeowner rent their property out, if there’s sufficient demand for it and the borrower stands to benefit financially.

For more information make an enquiry and an expert can get in touch to give you some more details.

Reasons why you may have been declined for a new interest only mortgage

If you’ve recently applied for an interest only mortgage in order to purchase a property but have been declined there may be a number of reasons why this is the case.

Unacceptable repayment vehicle

Lenders these days are, quite rightly, pretty strict when it comes to the type of repayment vehicle they consider appropriate to repay your interest only mortgage. If the vehicle you’ve selected is deemed inadequate your application will be declined, indeed it won’t be considered at all if you haven’t selected anything.

The following are all considered generally accepted repayment vehicles:

  • Sale of the property to repay a mortgage
  • Sale of another property owned by yourself to repay a mortgage
  • Endowment policies to repay a mortgage (less common these days)
  • Tax-free lump sum from a pension plan to repay a mortgage (equivalent to 25% of the value of the pension fund)
  • ISAs to repay a mortgage
  • Stocks and shares to repay a mortgage
  • Unit Trusts to repay a mortgage
  • Open Ended Investment Company (OEICs) to repay a mortgage
  • Investment Bond to repay a mortgage
  • Government Securities to repay a mortgage
  • Family inheritance or trust fund to repay a mortgage 

Whilst the above investment vehicles are all deemed generally acceptable a number, if not all, still represent a risk of capital shortfall at the end of the term if regular monitoring of the underlying investments (particularly equity-based) are not maintained.

For example, as discussed previously, the sale of the property to be mortgaged represents a risk whereby the borrower may have to downsize in order to repay the capital owed. If you get in touch we can make sure an expert will be able to provide you with the correct advice in this area.

Shortfall on your repayment vehicle

If you propose a pre-existing repayment vehicle on your application and the projected value suggests a shortfall on the amount to borrow for your interest only mortgage then this may result in your application being declined.

Alternatively, the lender may reduce the amount they’re willing to lend you leaving a gap which can be filled by using a part interest only part repayment mortgage option.

In practice, most lenders will accept the sale of the property as long as there’s sufficient equity to pay it off and the clients have a plausible and realistic solution for where they are going to live afterwards. All at underwriter discretion, of course.

Deposit requirements

Interest only mortgages typically carry higher deposit requirements from lenders than what you would expect for a repayment mortgage. This is to protect both the borrower and lender against any future interest only mortgage shortfalls during the term. Whilst most lenders require deposits as high as 25%, there are a few who will accept 15%.

You can read more about mortgage deposits here.

Lender age caps

A particular stumbling block can be lenders with specific age caps if the term you’re looking to borrow carries over well past your retirement age.

A popular solution to this conundrum are retirement interest only mortgages specifically for retirees (over the age of 55) who may be looking to use their pension fund or equity release as repayment vehicles. Some lenders now have age limits that reach as high as 90-95 and a few that have no limits at all.

Will bad credit affect an interest only mortgage application?

A poor credit history, without doubt, can cause problems in the future when you re-apply for credit with certain lenders depending on the type of issue you’ve had, the circumstances under which it occurred (underwriters are more accepting of unforeseen life events than general financial mismanagement, for example), and when it was registered (the older, the better).

The important thing is not to lose hope as there are some lenders who will look at applications from borrowers who have had credit issues in the past and a few who specialise in these types of applications.

Affordability

All lenders will work to their own affordability criteria, typically based on a multiple of your income. As a general guideline most lenders will offer 4-4.5 times a borrowers salary, some will use 5 times and a few will go as high as 6 times.

Below is an example of the differing amounts you could borrow based on an average annual income of £29,000 (median annual income in UK 2017 = £28,677).

Income Multiple Maximum Loan
4x Income £116,000
5x Income £145,000
6x Income £174,000

As you can see, this creates a wide range of loan amounts depending upon which lender you choose. You should also keep in mind that every lender take different factors into account when calculating affordability, such as debts and outgoings.

The expert advisors we work with know exactly which mortgage providers are best positioned to offer favourable rates to a borrower with your needs, circumstances and finances - make an enquiry to speak with one of them on the phone today.

Buy to let interest only mortgages

Lending criteria for buy to let interest only mortgages tend to have less stringent requirements than for residential properties particularly around the income requirements as a landlord will look to use the rental income from the property to repay the mortgage payments. The BTL property will also typically be used as the repayment vehicle.

You can read more about buy to let mortgages here.

Speak to an interest only mortgage expert

For further details about help with interest only mortgages and expert advice, Call Online Mortgage Advisor today on 0800 304 7880 or make an enquiry here.

Then sit back and let us do all the hard work in finding the broker with the right expertise for your circumstances.  – We don’t change a fee and there’s no obligation or marks on your credit rating.

Updated: 9th April 2019
OnlineMortgageAdvisor 2019 ©

FCA disclaimer

*Based on our research, the content contained in this article is accurate as of most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The info on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs. Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

Find out more about Interest Only Mortgages

Interest Only Mortgages