What if I Can’t Pay Off My Interest-only Mortgage

The number of interest-only mortgages has steadily decreased over the years, and the latest data shows that less than a million are left in the UK.

However, the repayment of these might be a cause of concern for the borrowers as many don’t have a suitable repayment vehicle for repaying the principal amount. 

If you’re facing such a predicament, you might wonder: “What if I can’t pay off my interest-only mortgage?”

Thankfully, there are multiple options you can go with in case you can’t repay your interest-only mortgage. In this article, we will discuss those and how you can use them to your advantage.

Let’s begin.

How Does An Interest-only Mortgage Works?

An interest-only mortgage is a more affordable method of getting a mortgage because you only need to repay the interest each month, keeping the monthly repayment amount smaller.

However, you must repay the capital amount in full at the end of the mortgage term. This itself might become a problem for those who don’t have a sound repayment plan in place. 

If you wish to retain the property, you’ll need to fund the repayment from elsewhere; otherwise, you’ll need to sell the property and repay the loan.

What if I Can’t Pay Off My Interest-only Mortgage

Now, let’s address the original question: what if your interest-only mortgage term has ended and you can’t repay the mortgage? 

Then, you can choose from any of the following options.

1. Seek A Mortgage Term Extension

In this option, you can request the lender to extend your mortgage term and postpone repayment to a later date. 

However, the lender might not always agree to this. And even if they do, you must ensure you have a repayment vehicle for eventual repayment.

2. Seek Equity Release

This option only works if you’re above 55 years of age. Here, you use excess equity in your property to qualify for an equity release mortgage to repay the loan after the last borrower dies, goes into long term care or sells the property. 

3. Remortgage 

In this option, you simply remortgage the property with a new lender, thus paying off the old loan. 

However, you’ll need to go through the entire mortgage approval process in this case and bear the associated fees should there be any. 

Further, if you’re nearing retirement age or don’t have a fixed income, you might be unable to remortgage.

What’s The Best Option If You Can’t Pay Off Yout Interest-only Mortgage

There will never be an option to categorise as best, as each case is individual. 

Since property prices have historically consistently increased in the UK (although not guaranteed), accessing equity release has been a helpful solution to borrowers over the age of 55. Using equity release, homeowners above 55 can repay their interest-only mortgages without needing to downsize or sell.

Those interested in equity release can also consider Lifetime Mortgages. 

In this type of mortgage, you make payments monthly if you can; otherwise, the entire loan amount plus interest is rolled up and repaid by selling the property after you pass away or move into permanent care.

This means no repayments are mandatory during your lifetime, and there’s no risk of repossession due to missed payments.

What Is A RIO Mortgage?

A retirement interest-only (RIO) mortgage is best suited for borrowers who can be sure to have a stable income even after retirement. 

Like a lifetime mortgage, the lender can recover the capital when the property is sold after the borrower’s demise or passing into permanent care. 

The difference is that in a RIO mortgage, you must repay the interest monthly, so there’s the risk of repossession if you miss payments.

Is It Necessary To Talk With A Mortgage Advisor?

No, it’s not necessary, but we recommend talking with a mortgage advisor if you can’t pay off your interest-only mortgage. 

Mortgage advisors are expert professionals who can help you select the best alternative based on your specific situation. 

You can connect with mortgage advisors we work with here.

Frequently Asked Questions (FAQs)

1. Is it possible to negotiate with the lender in case I can’t pay off the entire capital?

Yes, lenders are usually open to negotiations if you can’t repay the capital immediately. You can opt to restructure the loan or request partial repayments.

2. What factors affect the extension of an interest-only mortgage?

The factors that usually affect the extension of an interest-only mortgage are:

• Present financial situation
• Age of the borrower
• Stability of income

3. Is it possible to switch to a repayment mortgage from an interest-only mortgage?

Yes, it is possible to do so, subject to lender approval post-affordability and further assessments. Remember that this will increase your monthly repayment amount as you’ll repay capital and interest.

4. Can I declare bankruptcy if I can’t repay?

Bankruptcy is usually a last resort and can affect your credit rating and home ownership. In such cases, it’s best to seek the advice of a professional in this area..