What Happens When My Interest-Only Mortgage Ends?

When taking out an interest-only mortgage all those years ago, the date for final and full loan repayment probably seemed quite far away. But now that day is approaching, you may have thousands to pay in a lump sum.

Ideally, your original repayment vehicle is on track, and you have that money ready. If you don’t, however, there’s no need to panic just yet. There are options, and this guide breaks them down while explaining what to do if you can’t pay on time and even what to do if you can repay earlier than planned.

What happens at the end of an interest-only mortgage term?

At the end of an interest-only mortgage, borrowers must repay the entire loan amount. Options include paying a lump sum, selling the property, remortgaging, or arranging extended repayment with the lender. Planning is crucial to avoid financial challenges and potential property repossession.

A lender will usually be in touch at least a year before your term ends to remind you of the deadline, then again at 6 months and once more as that final date approaches. You can then request what’s called a redemption statement from the lender, which will confirm the specific amount to be repaid.

Your repayment options

Before taking out your mortgage, you’ll have to share your repayment strategy, how you expect to repay the loan at the end of the term, as part of your interest-only mortgage application. It could be that you planned to sell another property, cash in stocks, shares or investment bonds, or expect an impending pension or endowment policy to cover the cost. In an ideal situation, your original repayment vehicle will still stand, and you can implement that.

If circumstances have, however, changed, other end-of-mortgage term options include:

• Selling the property in question: As long as the sale price is high enough to cover the loan amount, the proceeds from the property could be used to pay off the loan.
• Selling a different property you own: If you own another property that is worth more or equal to the loan, you could consider selling it instead.
• Selling off other assets: Stocks, bonds, or even a boat could also be viable sources of revenue for you to use to make the repayment.
• Using savings or a pension: If you have the money in an ISA or pension and can afford to live after using it to repay, this could be a simple way to pay off the debt and own your house outright.

What happens if you can’t pay off your mortgage at the end of the term?

If none of the above options are available to you and you cannot repay your loan, then there are still avenues to pursue. A broker specialising in interest-only mortgages would be able to advise on which option might be best for you.

Ask your lender to extend the mortgage term.

The length of a mortgage term, typically 25 years, is usually decided upon at the outset of the mortgage agreement, but lenders are often open to extending terms. You could possibly ask for a 10, 15, or even 20-year extension to give you more time for your repayment vehicle to come through.

Of course, the lender will need to be assured that you’ll be able to make that payment at a later date, so they’ll once again assess your income and age and ask for details on your repayment plan. Some lenders are wary of extending terms to those over 75, so if that’s your situation, chat with a broker about other options.

Remortgage

If your lender denies the mortgage extension, you could explore getting a new interest-only mortgage with a different provider via a remortgage. As a new applicant, you’d need to repeat the process of having your income and outgoings assessed alongside your credit history and any debt. You’d also need to prove that you have a viable repayment vehicle.

Comparing rates across the whole market, an interest-only broker would be able to find you a new lender, perhaps even a specialist one, should you be self-employed, have bad credit or aren’t sure how you’ll pay back the loan.

Switch to a capital repayment arrangement.

If you can afford for your monthly repayments to go up significantly, you could talk to your current lender about transitioning the interest-only mortgage to a repayment model, meaning you’d be paying off the interest and a part of the loan each month. This would reduce the lump sum you’d be due to pay at the end of the new term. If your current lender isn’t willing to accommodate this, remortgaging with another lender onto a capital repayment mortgage is again a possibility.

Remortgage onto a retirement interest-only (RIO) mortgage

Age can sometimes be a detrimental factor when it comes to mortgages. Still, a retirement mortgage would allow a borrower, typically over 55, to repay the loan once they die, sell up or transition into care. Before entering into an RIO mortgage, it’s best to speak to a broker first to ensure it’s a viable option for you.

Use any equity to pay the loan.

It could be that since you bought your property, it’s gone up in value, giving you positive equity. You could then release some of that equity to pay back the loan. Most lenders require you to be between 55 and 95 to qualify for an equity release scheme. The percentage you can release – between 21% and 56% – would depend on your age and the property’s value. An advisor would be able to advise and assist with the process.

Can you make overpayments on an interest-only mortgage?

Overpaying an interest-only mortgage is certainly possible, but unlike with a capital repayment mortgage, that overpayment wouldn’t necessarily reduce the loan amount. Instead, it may reduce your future interest payments. The outstanding mortgage loan would remain the same as the equity you own in the property.

Of course, you could overpay into your repayment vehicle if this allows it to build up more funds and pay off your loan sooner than planned. Our calculator below gives you a rough idea of how this could work.

How a broker can help you choose the right solution

Whether your scenario involves a simple repayment or a more complex arrangement, a specialist lender can evaluate your current financial situation and advise on what repayment option might be best for you regarding the end of your interest-only mortgage term.

Should it involve a remortgage or equity release, an extension, or a shift in terms, a broker can negotiate each process on your behalf while also tapping into their database of lenders to find you a new deal.

In short, a broker will be able to:

• Offer you bespoke advice about interest-only mortgages
• Go over every option with you and make sure you choose the right option
• Help you get the best deal if you need to remortgage or take an equity release
• Help you with all of the paperwork
• Give you ongoing advice about your mortgage going forward

With the potential for so many moving parts in an already stressful situation, the brokers we work with can offer consistent support and ensure you move forward affordably and comfortably.

If you get in touch, we’ll arrange for an interest-only specialist to contact you immediately.

What if you’re in negative equity?

In a fluctuating market, your property could have decreased in value, and now the mortgage is bigger than the property’s current value. This is what’s called negative equity.

If that’s the case, a good first step would be to broach the idea of a mortgage extension to allow you more time to pay it off and for the market to potentially change. A broker would be able to lay out any further available options.

Mis-sold an interest-only mortgage

If you think you were sold a mortgage based on bad advice or a lack of proper explanation, you might have a case to submit to the financial ombudsman. However, the first thing to do is still talk to your lender about how you might alter your agreement to make repaying more attainable.

You can complain if they refuse to work with you to correct the situation. The financial ombudsman will then assess the situation from both sides, but they’ll want to see that you’ve done your best to come to a solution with the lender first. Usually, if they believe a mis-sale has occurred, they’ll urge the lender to find a solution. Going to court is a last resort.

Paying off your mortgage early

If you’ve done the calculations and worked out that you could pay off the full amount of your loan before the end of your term, that is an option. However, you would need to check whether your lender accommodates this and whether you opted for a variable or fixed interest rate. If fixed, it’s possible that you’ll be hit with an early repayment charge. This is usually a percentage, anywhere between 1% and 5%, of the total loan left. An expert could advise on whether this is best for your extra funds.

Meet with an interest-only broker

With so many options to consider, each with the potential to significantly impact your finances, expert advice regarding repaying an interest-only mortgage is necessary. This is where a specialist interest-only broker comes in. With a back catalogue of case studies and relationships with lenders across the interest-only market, the brokers we work with can guide you through their options and find a solution that best works for you.

Call 0330 818 7026 or fill out an enquiry form for a free, no-obligation consultation with an expert.