What Happens When my Interest-Only Mortgage Ends?
Nearing the end of your interest-only mortgage term and don’t know what to do? The guide below shares what to expect, what to do if you don’t have the finance, and where to seek advice.
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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 and 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?
When an interest-only mortgage ends, a borrower is expected to pay back, in full, the amount they originally borrowed. Up until this point, this type of mortgage means only the interest is paid off each month leaving the total loan repayment until the end. A lender will usually be in touch at least a year prior to your term ending 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
Prior to taking out your mortgage, you’ll have had to share your repayment strategy — the way in which you expect to pay the loan back 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 put that into action. 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 and it is worth more or equal to the loan, you could consider selling this 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 viably afford to live after using it to make the repayment, this could be a simple way of paying off the debt and owning your house outright.
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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 find yourself unable to pay your loan back, 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 oftentimes lenders are 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 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 to a broker about other options.
If your lender denies the mortgage extension then 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 once again 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 by a significant amount, 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 as well as 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 but a retirement mortgage would allow a borrower, typically over 55, to pay the loan back once they die, sell up or transition into care. Before entering into a 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 aged between 55 and 95 to qualify for an equity release scheme. The percentage you are able to release – between 21% and 56% – would be dependent on your age and value of the property. 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 go toward reducing the loan amount. Instead it may contribute to a reduction in your future interest payments. The outstanding mortgage loan would remain the same, as would the amount of equity you own in the property.
You could, of course, overpay into your repayment vehicle if it allows for it, in order to build up more funds and pay off your loan sooner than planned. Take a look at our calculator below for a rough idea of how this could work out for you.
Mortgage Overpayments Calculator
This calculator can show you how much you could save and what your new mortgage payments will look like if you were to make overpayments as a lump sum, monthly amount or both.
Your current monthly repayment is:
What your mortgage repayments will look like based on your overpayments:
Potential mortgage term reduction:
Amount of interest you could save:
Now that you have a rough idea of how overpayments will affect your mortgage deal, make an enquiry to speak to a broker for bespoke advice about whether this is the right option for you.
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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 will be able to evaluate your current financial situation and advise on what repayment option might be best for you when it comes to the end of your interest-only mortgage term.
Should it involve a remortgage or equity release, an extension or shift in terms, a broker can negotiate each process on your behalf whilst 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 remortgage or take 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 in a way that’s affordable and comfortable for you.
If you get in touch we’ll arrange for an interest-only specialist to contact you straight away.
What if you’re in negative equity?
In a fluctuating market, it could be that your property has 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 options available.
Mis-sold an interest-only mortgage
If you think you were sold a mortgage based on bad advice, or even just a lack of proper explanation, you might have a case to submit to the financial ombudsman. The first thing to do however is still talk to your lender about how you might alter your agreement to make repaying more attainable.
If they refuse to work with you to put the situation right, you can lodge a complaint. 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 taken place, they’ll urge the lender to find a solution. Going to court is a last resort.
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Paying off your mortgage early
If you’ve done the calculations and worked out that you could in fact pay off the full amount of your loan prior to the end of your term then that is an option. However, you would need to check if this is something your lender accommodates 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 would be able to advise on whether this is the best use of your extra funds.
Meet with an interest-only broker
With so many different options to consider and each with the potential to have a significant impact on your finances, expert advice when it comes to repaying an interest-only mortgage is a must. 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.
Reach out today on 0808 189 2301 or fill out an enquiry form for a free no-obligation consultation with an expert.
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Yes, you can sell your home at any point and use the proceeds from the sale, if not in negative equity, to pay off the mortgage.
You can reach out to your lender or broker at any time to ask when your repayment is due and for confirmation of the amount owed.
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