What happens at the end of my interest-only mortgage?
If your interest-only mortgage is coming to an end and you’re worried about not being able to make the final payment, or simply looking for a new deal, our guide is here to help.
What happens if you can’t pay off your mortgage at the end of the term?
Interest-only mortgages were designed to minimise the cost of loans on a monthly basis, with lenders requiring only the interest, rather than the capital loan, be paid off over the mortgage’s term. Less popular in recent times, they require the main mortgage loan to be paid off once the term ends.
If your interest-only mortgage is coming to the end of its term and you cannot afford to pay it off, then there are a few options open to you:
Before your term ends, speak directly with your lender especially if you’re worried you cannot keep making payments. Lenders cannot call in the mortgage loan until after your term expires, so they can help you explore options.
Extend your mortgage term. If you cannot pay off your mortgage when the term ends, then you can ask your lender to extend it. This will likely involve an affordability assessment but will give you several extra years to pay off the remaining amount.
Remortgage. Look into finding a new deal with a different lender. By doing so, you could switch to a repayment mortgage, where you will pay off the capital of your mortgage, as well as the interest.
Release equity. If the value of your property has increased and you are over 55, you can release equity to pay off your interest-only mortgage. Doing so means no more mortgage payments, but the money released comes in the form of a lifetime loan which will need to be paid off when the homeowner dies or if they have to go into care, using the proceeds of the house sale.
Look into moving. If you have a larger property, consider downsizing to a smaller one and using the additional funds from the sale of your home to pay off your mortgage.
Can you make overpayments on an interest-only mortgage?
Yes, you can make overpayments on an interest-only mortgage. However, doing so does not increase the equity in your home, as it does when overpaying a repayment mortgage.
Instead, the overpayments you make simply reduce the amount of interest you pay in the future or overall interest payments. Doing so can help you reduce your monthly outgoings, however, so is not a bad option if you have some money available to do so.
Check how much you can save by overpaying with our overpayment calculator.
Does an interest-only mortgage ever get paid off?
An interest-only mortgage has to be paid off in full at the end of your mortgage term. This means that homeowners will need to plan well in advance for this moment and ensure that they either have the funds to do so or are able to remortgage or move home to pay off the loan.
Those on interest-only mortgages may look to take out savings and investment products to accrue funds to pay off the capital of their mortgage when it ends. The risk here is that savings and investments may not increase over time, meaning that you might come up short and not be able to pay off the mortgage when you need to/
What is the best way to clear an interest-only mortgage?
There are numerous ways to pay off an interest-only mortgage. If you do not have access to the funds required to do so, then the best option is to either speak with your lender to extend your deal or remortgage, with your new lender paying off your old loan, while you switch to a new deal. It may be best to switch to a repayment mortgage if you can afford it, which will help boost your equity.
If you have savings, you can use these to pay off your interest-only mortgage or use equity release to take funds out of your property to pay off your debt.