Taking out any mortgage is a big deal. With monthly repayments and the sheer length of time you’re locked in for, a mortgage to buy a property is likely to be the biggest debt most of us take on in our lifetimes.
An interest-only mortgage adds an extra layer of complexity. As they’re so risky, fewer mortgage lenders are willing to provide them than this time ten years ago. Anyone with one needs to be sure they can make the lump sum repayment at the end of their mortgage term.
Consider switching to a repayment mortgage if you have an interest-only loan with no plan to repay the borrowing. Alternatives include equity release for the over 55s, or overpaying on your existing mortgage.
If that date is looming and you don’t have a plan to repay borrowing, you need to act sooner rather than later.
This guide looks at what happens at the end of an interest-only mortgage and what you need to do if you don’t currently have a plan to make repayments.
We update all our guides regularly. If you are researching Interest-Only Mortgages and we haven't got an exact guide that helps you, keep coming back as we update daily.
With any mortgage, you borrow a lump sum of money to buy a property. This debt is then secured against your home. You make repayments over time, and by the end of the mortgage term (typically 25 years) you’ll have paid off your loan in one way or another.
There are two ways this can work. The first is a repayment mortgage, where each month you make a repayment that includes both a chunk of the money you borrowed and any interest your balance has accrued. Over time, you’ll chip away at the amount you owe until you’ve paid back every penny you borrowed plus the interest that was added on.
The other way is interest-only mortgages. Here, each month you only pay off the interest. This means lower monthly repayments, but you never chip away at the sum you owe. At the end of the mortgage term, this lump sum has to be paid back in full.
The different repayments might look something like this:
|Mortgage Type||Mortgage Amount||Interest Rate||Monthly Repayment||Left to pay at the end||Total repaid|
If you've got an interest-only mortgage and you currently don't have a plan to repay your borrowing in full, it's best to do something about it sooner rather than later.
Depending on how close you are to the end of your mortgage term, there are likely to be a couple of different options available to you.
If you don't have a plan but do have some serious savings, make sure these are working as hard for you as they can. Look for savings or investments with the best rates. You could even consider setting up an investment plan to raise capital before the payment is due.
If you don't think you'd be far off the amount, you owe with the savings you have, check with your lender to see if you can make voluntary overpayments on your mortgage. This means you'd pay less interest overall and can start to chip away at that remaining balance too.
You may be able to talk your current interest-only mortgage lender into extending your term for you. This will give you more time to save up the money you need to pay off the balance. If your current lender doesn't let you extend your term, then another might let you remortgage to take out a new deal.
This is dependent on you meeting the eligibility criteria but is more accessible than ever before with more providers offering later-life mortgages.
If it's pretty early days, but you don't think you'd be able to pay back what you owe, get in touch with your lender to see if you can switch to a repayment mortgage. They might also let you extend the term to give you more time to pay it off. This will cost you more in monthly repayments, but you will be able to start chipping away at that capital you owe.
If you find yourself struggling to meet the higher monthly payments, or worse you miss a payment on your mortgage or slip into arrears, first contact your lender to see if you can work out a new, more affordable agreement. You might also want to speak to a debt charity such as StepChange to get your spending and saving back on track.
If you're at least 55 years old, you may be able to release some of the cash tied up in your home as a lump sum through equity release. This money can be used to pay off your debt without having to sell your home.
There are typically two different camps of people that do this: those where this was the plan all along and those where this is the last resort.
Relying on selling the property at the end is all well and good if its value has increased over time. But all it takes is one unfortunately-timed dip in the housing market, and you could be left with a property that you cannot sell for the market value you expected. In this case, you'd need to find money from somewhere else to plug the gap and pay off your debts.
When you take out an interest-only mortgage, you should have had a conversation with your lender as to how you planned to pay off the balance. They have to be sure that you have a sufficient, reliable plan in place to meet your repayments before approving you.
If this conversation either didn't happen at all, or you were approved on the basis that you'd use a high-risk investment or a chance windfall like an inheritance or compensation claim that's yet to come in, then it's possible that you were mis-sold your interest-only mortgage. If you were, you may be owed compensation, so it's worth looking into making a claim.
Here at Money Savings Advice, we have partnered with some of the UK’s leading Financial Claims management companies. They have already helped thousands of people claim compensation for mis-sold financial products and they can do the same for you.
Choosing an independent claims management company means they won’t proceed with a claim unless they are sure it is in your best interests. They are also regulated by the FCA, which gives you an additional layer of protection.
If you would like to speak to one of these claim management companies who can help you make a compensation claim, then click on the below and answer the very simple questions.
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