Interest-only mortgages are an excellent tool for those who can’t afford to pay hefty monthly installments and want to repay only the monthly interest which could be for a variety of reasons.
However, as the end date of the interest-only mortgage approaches, you may have a large amount left to repay without a suitable repayment vehicle in place.
And this can seem like an intimidating prospect if you don’t have your original repayment amount ready.
But don’t worry—multiple options are available, and this guide will explain everything you need. Let’s get going.
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What Happens at the End of an Interest-Only Mortgage?
When the term of an interest-only mortgage ends, the borrower must repay the entire loan amount.
They can do so in either a lump sum manner, remortgage, sell the property, or arrange for an extended repayment term with the lender.
In such cases, careful planning is needed to navigate the situation and avoid repossession.
Usually, lenders will notify the borrower at least a year before the end of the term, then again at a six-month interval, and finally once more before the date approaches.
You can request a redemption statement from the lender, including the repayment amount.
Options For Repayment
When taking out an interest-only mortgage, you’ll need to share your repayment strategy with the lender, which explains how you plan to repay the loan at the end of the term.
You can do this in many ways, such as selling another property, encashing investments such as bonds, stock, and shares, or using the funds from a pension or endowment policy.
Ideally, your original repayment plan should be in place, and you can implement it. However, circumstances might change, and you must create another plan. This, too, can include multiple options, such as selling the property against which the mortgage was taken to repay the loan, selling off another property, or encashing other assets to repay the loan.
What If You Can’t Pay Off The Mortgage At The End Of Term?
Other options are also available if you cannot avail yourself of any of the above alternatives and can’t pay off the mortgage at the end of the term.
In such cases, a mortgage broker specializing in interest-only mortgages could help you navigate alternatives, some of which are explained below.
1. Mortgage Term Extension
Mortgage terms are usually 25 years, but lenders can extend them if requested. You can request a 10, 15, or even 20-year extension to repay the mortgage.
Of course, in such cases, the lender will need to verify whether you can repay the loan even after the extension.
This means you’ll need to undergo another application assessment for your revised repayment plan.
Your occupation and age will also factor in, as lenders are wary of lending to people past retirement age.
2. Remortgaging
If you can’t get approval for an extension from the lender, you can explore getting another interest-only mortgage with a different lender and remortgage the existing one.
Keep in mind that with a new lender, you’ll need to go through the entire process, and you’ll need to prove that you have a repayment plan in place.
3. Move To A Capital Repayment Plan
If you can now afford higher monthly payments, you can move to a capital repayment plan with your lender, in which you pay back part of the capital as well as the interest each month.
If your present lender is not willing to accommodate this, you might look for another lender with more favourable terms for remortgaging.
4. Get A RIO (Retirement Interest-only) Remortgage
As mentioned previously, while remortgaging, your age might prove to be a hindrance.
However, this can be overcome using a RIO mortgage, which allows borrowers aged 55 and above to repay the monthly interest on the loan with the capital being repaid when the borrower dies, goes into long term care or sells the property.
It’s best to speak with a mortgage broker to understand if this is the best option for you. Talk to one here.
5. Use Up Equity To Repay The Loan
In case your property has gone up in value, providing extra equity, you can consider releasing some of it to repay the loan.
Usually, if you’re between 55 and 95 years of age, you can qualify for equity release schemes.
The equity percentage you’re allowed to release depends on your present age and the value of the property.
Frequently Asked Questions (FAQs)
1. Can I overpay on an interest-only mortgage?
Yes, you can, and this will more than likely reduce the principal loan amount as most lenders use overpayments towards the capital; potentially reducing the interest repayment.
2. Is it possible to sell my property if I have an interest-only mortgage?
Yes, you can sell your house at any point and use the proceeds to repay the loan.
Your home may be repossessed if you do not keep up repayments on your mortgage.
All content is written by qualified mortgage advisors to provide current, reliable and accurate mortgage information. The information on this website is not specific for each individual reader and therefore does not constitute financial advice.
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