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.
Key takeaways
Overpayments on your mortgage usually reduce future interest payments, not the capital, but some lenders allow overpayments to reduce capital by arrangement
Be aware of restrictions or early-repayment charges
If you are unable to pay off your mortgage at the end of the term you can extend your mortgage term, remortgage, release equity or move
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.
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:
Options that my be open to you
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, 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.
The critical thing to note is that when overpaying a repayment mortgage, all your overpayment will help reduce the capital sum of your home loan. So when you overpay, you're always paying down your mortgage balance.
However, with an interest-only mortgage, in most cases your overpayment will usually just reduce future interest payments or the overall interest you pay.
For that reason, it can still save you money. But overpaying on an interest-only mortgage won't generally increase the equity you hold.
That said, there are exceptions. Some interest-only mortgage lenders will let you overpay to reduce the capital you owe. This is typically by arrangement with your lender.
Furthermore, it's worth noting that restrictions or early-repayment charges on overpaying interest-only morrtgages may apply. And with this in mind, you should make sure you factor to these into your savings calculations.
We'd say that if you're in two minds about overpaying on an interest-only mortgage, the best idea is to speak to your lender or broker.
Does an interest-only mortgage ever get paid off?
The day of reckoning for interest-only mortgages comes when the term ends and the full loan amount is due.
Homeowners should have a robust plan 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, it's time to consider the previously mentioned options like remortgaging or moving.
Does an interest-only mortgage ever get paid off?
Clearing an interest-only mortgage requires careful consideration and action. Engaging in conversation with your lender can open doors to extending your current deal or finding a new one through remortgaging.
If your financial situation allows, switching to a repayment mortgage could be beneficial in the long run as it builds equity in your home.
Lastly, if you have substantial savings or can opt for equity release, these could be your ticket to paying off the mortgage.
Your home may be repossessed if you do not keep up repayments on your mortgage.