My Interest Only Term is Coming to an End Soon – What Should I Do?
By Pete MuglestonMortgage Advisor
Last updated: 17th December 2018
People in the UK often contact us to ask “what happens at the end of my interest only mortgage?” and this question obviously comes into sharp focus if you’re in the position of having an interest only mortgage ending soon.
To put it simply, you will need to repay the loan amount in full. There are many ways you could do that and we have assisted lots of customers in this very scenario.
To help, we have put together the key information you need to know about interest only mortgage end of term issues, with complete with advice on what to do if you’re having a tough time with them.
What happens when an interest only mortgage ends - can you remortgage?
Customers often get in touch to ask us what their options are when they reach the end of an interest only term, and there’s usually a number of them.
Ask your current lender to extend the term
You can ask your existing lender if it is possible to extend your mortgage to give you more time to find the money to pay if off.
Some lenders will be happy to extend your mortgage, as long as you can convince them that you will be able to repay the debt over a longer period.
However, older borrowers might face an uphill battle convincing their mortgage provider to extend as some won’t lend to anyone over 75.
At others, the limit is 85 and a minority will impose no upper age cap as long as their convinced you can handle the payments post-retirement.
Those who don’t have adequate income might also struggle to convince their lender to lengthen the mortgage term.
Remortgage to a new lender
If your mortgage provider says no to a term extension, there’s always the option to find another lender. When remortgaging to a new lender, you’re basically applying from scratch, so you will need to pass their affordability and eligibility checks.
You might require a specialist lender if any of the below applies to you…
You have non-standard income: A big, juicy PAYE salary is the most attractive to lenders, so self-employed borrowers and those who supplement their income with benefits and freelance work on the side should seek specialist advice to ensure they end up with the best remortgage deal. You can find more information about self-employed mortgages here.
There’s adverse credit on your file: Lenders with certain types of bad credit against their name may also have to find a specialist broker to ensure they find the right remortgage lender. Certain mortgage providers consider some forms of adverse (such as repossessions and bankruptcies) too high risk and others will offer you a less favourable deal if you have any credit issues at all. Bad credit mortgage specialists, however, may base their lending decision on the age of the credit issues and take into account its severity. You can read more about bed credit mortgages here.
You’re over 75: As previously mentioned, some mortgage lenders won’t deal with customers over 75. Some are happy to lend to customers over 85 and a minority will cater for customers even older, as long as they’ve confident they will be able to meet the mortgage repayments in their retirement.
You haveno repayment vehicle: In order to find an interest only remortgage deal elsewhere, you’ll still need to prove to the new lender that you have a repayment vehicle in place. Acceptable repayment vehicles include…
Stocks and shares
The sale of another property
We cover repayment vehicles in more depth in the section below.
What are the exit strategies available?
‘What can I do when my interest only mortgage ends?’
That is a question many people ask as they contemplate the end of their interest only mortgage term, and what to do when their interest only mortgage ends.
The good news is that you have a number of options.
Options when interest only mortgage ends:
Sale of property (downsize)
Sale of another property
Remortgage to a retirement mortgage
Switch to repayment
Perhaps the most extreme solution is the sale of your home to pay off the outstanding amount. This option comes with difficulties though, and these may start with any problem you have trying to sell the property at the price you need. It also raises the obvious question of where are you going to live afterwards – are you going to downsize?
In which case, is the difference between the value of the two homes enough to pay off the mortgage?
Sell another property
If you are in the enviable position of having another property that you can sell to pay off the mortgage then that might be a good way forward, providing you were not relying on that investment to provide your pension.
Use your pension or savings?
If you have enough savings, an ISA or a pension lump sum then these are examples of ways you can pay, but some investments have performed poorly in recent years and won’t reach anywhere near the sum required. If all else fails, perhaps you can ask family or friends to help you out?
Remortgage to a retirement mortgage (if lending into retirement)
You may be able to switch your mortgage to another lender that offers a ‘later life’ loan such as a lifetime or retirement mortgage.
A lifetime mortgage is the most popular type of equity release mortgage in the UK. They are aimed at over-55s and involve the borrower securing loan against their property.
They continue to own the home and make no payments during their lifetime as the loan and interest are paid off through the sale of the property at the end of the term, usually when the borrower dies or enters long-term care.
This allows the borrower to take out a cash lump sum from their home to enjoy during their retirement years, but releasing equity from a property should never be done lightly, so be sure to speak with a specialist advisor before pressing ahead.
Switching to a repayment mortgage
In some cases, it may be possible to change the mortgage to a repayment loan, although the monthly amounts payable will rise significantly.
Your current lender may allow this so you can pay off the outstanding debt plus interest over the newly-agreed term - but you should consult a whole-of-market broker before locking yourself into a deal, as there may be a superior offer available elsewhere.
Releasing equity may be an option
If your property is worth more than you paid for it, and you are in the fortunate position of having positive equity, then you may be able to release this equity to pay off the mortgage.
You can work out whether you have equity by subtracting the total amount you owe on all loans secured against the property from its appraised value.
The specialist advisors we work with can help you determine whether releasing equity is a viable option for repaying your interest only mortgage.
What happens if your property is in negative equity?
Negative equity is a problem experienced by many homeowners, especially in parts of the country where the market slumped during the financial crisis.
People were left with mortgages to pay off that were higher than the value of their home. Again, the advisors we work with can assist you if you are in this category.
Does age have a bearing – how old can you be and still get a mortgage/remortgage?
How old you are at the point you apply for a mortgage does become a major factor if you are close to retirement age or older.
But it is easier now to find a mortgage as specialist lenders have come onto the market in recent years. As we touched on earlier, some providers won’t offer a mortgage to anyone over the age of 75, but others are more flexible and will go up to 85, and there are even lenders who have no upper age limit, as long as they’re convinced you’ll be able to repay you mortgage in your retirement years.
Will the condition or construction type of property have a bearing?
Yes, the condition and type of construction can have a bearing on whether you can remortgage later in life. In the same way these factors can be important in any mortgage application, and the lender’s attitude towards properties which are in a poor condition or have non-standard construction (e.g. a thatched roof, timber frame etc), is very important.
It may result in a lender asking for a larger deposit, or not offering the most competitive rates.
What to do when your interest only mortgage ends - are there specialist lenders who can help?
If your interest only mortgage is ending, whether you’re a straightforward applicant or a complex borrower with negative equity and a non-standard construction property, there are specialist lenders who can help.
We work with whole-of-market advisors who can find the right lender for you, based on your personal circumstances, so make an enquiry to speak with them today.
Interest only mortgage FAQ
Below you will find the answers to some of the most frequently asked questions we receive from customers in the market for an interest only mortgage…
Interest only vs repayment: What are the pros and cons of interest only?
Customers often say to us “my interest only mortgage is coming to an end - shall I stick with this product type or switch to repayment?” This isn’t a straightforward question to answer but being aware of the pros and cons of both types should help you make the right decision.
The pros of an interest only mortgage
Interest only payments are cheaper than repayment, leaving the person with more disposable cash each month.
It is a popular form of loan with landlords who have buy to let investments, want the extra disposable cash, and have no intention of keeping the mortgage full term.
The cons of an interest only mortgage
You are not paying off any of the capital and you pay more interest overall.
As you are not paying off any of the loan, you might find yourself in a weaker position if you want to negotiate another mortgage.
A repayment vehicle is essential and there may be a risk it won’t pay out.
You can usually not borrow to as high a loan to value (LTV) than with repayment, with most lenders capping interest only lending to 75% (although some will go to 85%).
Ultimately if you’re in the position of an interest only mortgage running out and you don’t have the means to pay it off, then your home is at risk - but before you start to panic, keep in mind that there may be fall-back options available, so get in touch and the experts we work with will discuss them at length and help you decide the best course of action.
What types of Interest only mortgage are there?
Interest only for main residence
Interest only buy to let - why these are more suitable for landlords
Lifetime and retirement Interest only
Interest only residential mortgages
There are different types of interest only mortgages on offer, depending on the circumstances of the buyer and the purpose of the loan.
Many people still go for an interest only mortgage on their main residence even though there is some risk if the capital can’t be paid off at the end of the term, but only when they are confident that their repayment plan will allow them to repay the mortgage at some point within the term.
They are attracted by the lower monthly payments, and take some reassurance from the fact that house prices usually rise. If prices rise then they will have equity at their disposal later on, which is useful when they come to remortgage.
Interest only buy to let mortgages
Landlords often choose interest only terms for buy to let properties because the payments are lower, which frees up some cash they can invest in other properties.
They may also intend to sell the property well before the end of the mortgage to pay off the outstanding amount. Some landlords remortgage once there is equity in the property they can release to fund other investments.
Lifetime and retirement interest only mortgages
There are lifetime or retirement mortgages available for people who still need to borrow later in life. They are not usually setup over a fixed term, and are paid off when the person dies, or moves into a care home through the sale of the home.
Some people use these types of mortgages to release equity, which gives them disposable cash to spend in their retirement or give to their children to help them onto the housing ladder. Some ‘lump sum’ mortgages allow for all of the interest to be added to the final amount owed, meaning there are no monthly payments to make. This option often means, though, that there is of course, less left for your family to inherit.
Speak to an interest only mortgage expert
Getting advice from an advisor who knows the market and can access the right lenders for you is crucial. It can make the difference between being able to successfully pay off your interest only mortgage and running into real difficulty.
We work with a team of specialist advisors who will be able to help you whatever your circumstances. We don’t charge a fee and there is absolutely no obligation or any marks on your credit rating.
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 charge a fee and there’s no obligation or marks on your credit rating.
*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.
Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes.
The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.
Pete's presence in the industry as the 'go-to' for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for OMA of course!
Read more about Pete here...