What happens at the end of my interest-only mortgage?
When your interest-only mortgage ends, you will still owe the mortgage lender the original capital you borrowed. So what should you do?
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 your 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.
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.
If you have sufficient time before your interest-only mortgage ends, ask your lender to switch it to a repayment mortgage. This will increase your monthly payments but endure that the balance is repaid at the end of the term. Depending on affordability, you may need to extend your mortgage term too.
If you cannot pay off your mortgage when the term ends, then you can ask your lender to extend it. This will involve an affordability assessment, but will give you several extra years to pay off the remaining amount. The longer your mortgage term, the more interest you will pay in total.
Look for 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.
If the value of your property has increased and you are over 55, you can use equity release 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.
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.
Many buy-to-let landlords have interest-only mortgages and sell the rental property at the end of the term to repay the loan. In theory, owner-occupiers could also sell their home to repay the mortgage – but they would then need somewhere to live
Switch to a repayment mortgage
Extend your mortgage term
Remortgage
Release equity
Move house
Sell the property
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 mortgages may apply. And with this in mind, you should make sure you factor to these into your savings calculations.
To find out whether overpaying on an interest-only mortgage is the right course of action for you, speak to your lender or a 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.
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.
