What Happens at the End of an Interest-Only Mortgage Term

With an interest only mortgage you only need to pay off the interest each month, with capital repayments being options, so most people end up with a debt to settle at the end of the term.

In this guide we’ll talk you through your options at the end of an interest only mortgage and discuss some exit strategies.

We’ll also investigate how a specialist mortgage broker can help, especially if you’re worried that you can’t afford to pay off your interest only mortgage at the end of its term.

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What happens at the end of an interest only mortgage term?

Interest-only mortgages do exactly as their name suggests – they allow borrowers to keep monthly payments low by only repaying the interest on the loan, and only making capital repayments if they want to.

At the end of the mortgage term, your lender will expect the full loan amount to be repaid to settle the debt.

For example, if you take out a £200,000 interest only mortgage over 20 years, at the end of 20 years you will have to pay back £200,000.

Interest only mortgages were especially popular in the 1980s and ‘90s and so many are coming to the end of their terms now.

How a mortgage broker can help you

Coming to the end of your interest only mortgage term can feel daunting.

If you want to make sure your exit strategy is the best and most affordable for you a specialist broker can help.

Many of the brokers we work with specialise in interest only mortgages and can help you work through your options, choose a cost effective repayment vehicle and help you get the best deal if you need to remortgage.

If you get in touch we can arrange for a broker who specialises in this area to contact you straight away.

Your options at the end of the term

You essentially have three options at the end of your interest only mortgage:

Pay off the balance with a repayment vehicle

This could be investments you’ve set up especially for this purpose, generic savings or something like the sale of a second home.

It could be a mix of different sources but the key outcome with this option is that the debt is cleared, the mortgage is settled and you remain in the property. The plan you have in place to pay off your mortgage is called a repayment vehicle.

Viable repayment vehicles

Choosing the right repayment vehicle for you will depend on your personal circumstances and your approach to investment and risk.

Different lenders may also have preferred payment vehicles, but typically you’re looking at the following…

• Savings accounts
• ISAs
• Stocks and shares
• Investment bonds and unit trusts, pensions or the sale of another property.

Downsizing

If you don’t have enough money to repay the debt in full, or if you want to take the opportunity to downsize to a smaller home, then you might consider selling your property to pay off the mortgage.

This option is most viable if you currently live in a large home, an expensive area, or if your house has increased significantly in value.

If you bought your house 25 years ago with a £150,000 mortgage for example, and it’s now worth £500,000, you could sell, pay off the original loan amount, and have enough leftover to buy a new home for up to £350,000.

Remortgage

If you can’t afford to pay back the loan amount in full but want to continue living in your home, you may be able to remortgage either with your existing lender or a new one, or extend the term of your current mortgage.

You’ll still need to show a lender that you can afford the repayments and that you have a viable repayment vehicle in place.

If you’re approaching the end of your mortgage term and know there’s going to be a shortfall, one option is to remortgage onto a new repayment mortgage agreement.

A specialist broker can help you decide which of these options is right for you, and make sure you get the best deal if you need to remortgage.

How a mortgage broker can help you

Coming to the end of your interest only mortgage term can feel daunting.

If you want to make sure your exit strategy is the best and most affordable for you a specialist broker can help.

Many of the brokers we work with specialise in interest only mortgages and can help you work through your options, choose a cost effective repayment vehicle and help you get the best deal if you need to remortgage.

What if you can’t afford to pay off your mortgage debt?

Many people with interest only mortgages realise, as the end of the term approaches, that they aren’t going to be able to afford to pay off their loan.

This could be due to poor planning, disappointing investment performance, or unexpected changes in financial circumstances such as a job loss, divorce or the loss of an inheritance.

While selling your home is an option, if you’re keen to stay put, there are alternatives…

Ask your current lender to extend the term of your existing mortgage

If you just need a little more time your current lender may be able to extend the term of your existing interest only mortgage.

This will depend on your financial circumstances and you’ll need to be able to show your lender that the extra time is going to make a difference and that you have a plan in place to clear your loan at the end of the new term.

Remortgage with a different lender

If your current lender won’t extend the term, remortgaging with another lender might be an option.

Remember that remortgaging is basically starting a new mortgage from scratch, so you’ll need to meet a lender’s eligibility and affordability criteria.

While in the past it’s been harder for older people to remortgage at the end of an interest only mortgage, within the last few years the rules around interest only mortgages have been relaxed and now there are plenty of specialist lenders offering Retirement Interest Only mortgages, (RIOs), increasing the options for older borrowers.

Switching to a repayment mortgage

If you don’t want another interest only mortgage, there may be the option to switch to a repayment mortgage.

Remember that the monthly repayments on this will be significantly higher and you’ll need to go through affordability checks with a potential new lender.

Switch to a part-and-part agreement

If you can’t afford the monthly bill on a standard repayment mortgage, there are some hybrid mortgages available, where you pay off a part of the capital but not all of it.

These part interest only and part repayment mortgages are often known as ‘part-and-part’ mortgages and can often be a good compromise.

It’s a good idea to get some specialist advice from a broker if this is something you’re considering. They will be able to calculate the best part-and-part deals for you based on your individual circumstances.

Try our calculator below to see how your new repayments could look if you choose this option.

What if you have negative equity?

If you have negative equity – i.e. your outstanding loan is more than the value of your home – this can make things more complex.

Selling your property to pay off your loan won’t be an option unless you have savings to cover the shortfall and most lenders aren’t keen to lend to homeowners with negative equity.

In this case you may benefit from the help of a specialist broker to help you explore your options and find an affordable solution.

There will be specialist lenders who can help, although they may not be the high street lenders that you can easily find without the support of an expert.

Get matched with a specialist mortgage broker

Although you might feel anxious about reaching the end of your interest-only mortgage term, the most important first step is to empower yourself with the best information and expert advice.

Without a plan you risk being left high and dry and having your home repossessed or be forced to sell your property when you don’t want to.

We work with mortgage brokers who specialise in interest only mortgages.

They help people find the best solution for settling their debts every day, which makes them ideally placed to go through all of the available options with you and help you choose the right one.

By using our free broker-matching service, you can rest assured that you’ll be paired with the right mortgage broker for your needs and circumstances.

Give us a call on 0808 189 0463 or make an enquiry and we’ll set up a free, no-obligation chat between you and them today.