What happens at the end of my interest-only mortgage?

Key takeaways

• Interest-only mortgages have cheaper monthly payments as you only pay the interest on the loan – you don’t repay any of the capital.

• At the end of the mortgage term you will still owe the lender the amount you originally borrowed.

• The mortgage lender can call in the loan at the end of the term.

• If you can’t repay the lump sum, your options include extending your mortgage term, remortgaging, selling your property, or releasing equity.

How do interest-only mortgages work?

With an interest-only mortgage, each month you only pay the interest on the amount you borrowed. Your payments will not include any capital repayments.

This differs from a repayment mortgage, where you pay back both interest and some of the loan each month. This gradually reduces the debt until it’s fully paid off by the end of the mortgage term.

At the end of the term of an interest-only mortgage you will still owe the amount you originally borrowed.

In an ideal world, when your interest-only mortgage ends, you’d have sufficient cash savings or investments to pay off the capital balance. But unfortunately, this won’t be the case for many borrowers.

If you don’t have an adequate repayment plan, you should contact your lender as early as possible, ideally years before the term ends, but immediately if you’re within the final 12 months.

The rules about interest-only mortgages

The rules for interest-only mortgages tightened significantly in 2014 following the Mortgage Market Review (MMR).

This meant lenders had to be more confident in borrowers' ability to repay the full mortgage balance when the interest-only term ended.

This shift resulted in fewer interest-only mortgages being offered and a greater focus on borrowers having a repayment strategy in place.

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

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.

Can you make overpayments on an interest-only mortgage?

Yes, you can make overpayments on an interest-only mortgage. However, overpaying on an interest-only home loan is a bit more complicated than overpaying on a repayment mortgage and may not always be the right option for you.

Check with your lender how overpayments will be treated. In most cases, overpayments are applied directly to the capital balance, reducing the amount you owe. The interest charged on your mortgage will then be recalculated based on the lower balance, which could reduce your overall interest costs.

Some lenders may have specific rules about how overpayments are applied, so it's worth confirming this before making any additional payments.

There may also be limits on how much you can overpay without triggering an early repayment charge, so check your mortgage terms or speak to your lender first.

If you're unsure whether overpaying on an interest-only mortgage is the right option for you, speak to your lender or a mortgage broker.

Does an interest-only mortgage ever get paid off?

When the term of an interest-only mortgage ends, the full loan amount is due.

Rules and lender criteria can change, but lenders will still want to understand how the capital will be repaid.

Ideally homeowners should have a repayment strategy in place to accumulate the necessary funds. This could involve savings or investment products, though there's always the risk that these might not yield the expected growth.

If the end of the term is near and the required funds are not available, you’ll need to consider one of the options above.

Speak to your lender to discuss your options.

Your home may be repossessed if you do not keep up repayments on your mortgage.