What to Do When Your Interest Only Mortgage Ends
If you’re approaching the end of your interest only mortgage term, you might be feeling a little uncertain about what comes next. You’ve spent years paying off just the interest which would have saved you money monthly, but now the original loan amount is due. For some homeowners, this can be a daunting prospect if you don’t have a clear repayment strategy in place.
However, there can sometimes be practical solutions available. Whether you’re looking to stay in your home, explore new borrowing options, or release equity, you should talk with a qualified mortgage adviser that can look at the options based on your own unique situation.
Understanding Interest Only Mortgages
With an interest only mortgage, your monthly payments cover just the interest charged by the lender. The capital, which is the amount you originally borrowed remains untouched throughout the mortgage term.
When the term ends, the entire capital is still outstanding and needs to be repaid. Ideally, you’d have savings, investments, or another repayment method in place, such as downsizing or relocating. When you took the mortgage out, it’s likely you would have told your lender or adviser your future plan.
Some borrowers, however, find themselves without a clear solution when it comes to the point of paying the lender back, for a variety of reasons. If you’re in this position, now is the time to explore your option.
Find out Your Options
Option 1: Remortgage onto a Repayment Mortgage
One common route is to remortgage onto a capital repayment mortgage. This allows you to start paying back both the capital and the interest each month, typically over a new term of 10 to 25 years.
This option depends on several factors, including your income, age, the value of your property, and how much you still owe. If you’re in a strong financial position, this might be a straightforward way to ensure you repay the loan in full over time.
However, monthly payments on a repayment mortgage will be higher than those on your current interest only deal. It’s important to understand what you can realistically afford before committing as this may not be possible, in terms of getting agreed by a lender and meeting your own monthly budget.
Option 2: Extend Your Mortgage Term
In some cases, your current lender may be willing to extend your mortgage term. This gives you more time to put a repayment strategy in place or to improve your financial situation.
Extensions are sometimes considered when there’s a clear plan for repayment, such as funds due from a pension, inheritance, or the sale of another asset. Age can be a factor here, and lenders will want reassurance that you’ll be able to repay the debt eventually. Not every lender will agree to do this but the only way to know is to get in contact with them to see if that would be an option and what the process would be.
Option 3: Switch to a Retirement Interest Only (RIO) Mortgage
If you’re aged 55 or over, a Retirement Interest Only (RIO) mortgage could be a suitable alternative for some borrowers that have a strong retirement income. This type of mortgage allows you to continue making interest payments for the rest of your life or until you move into long-term care or pass away. The capital is repaid from the eventual sale of the property.
A RIO mortgage can be a good way to stay in your home without increasing your monthly payments dramatically. You’ll need to meet affordability checks which can be difficult as the borrowers each need to be able to cover mortgage interest on their own, but there’s no fixed end date to the term.
Option 4: Take Out Another Interest Only Mortgage with a New Lender
If you’re not ready to repay the capital but still want to maintain lower monthly payments, you may be able to take out a new interest only mortgage with a different lender. This can be a practical solution if you meet the lending criteria and still have a strong repayment strategy in place.
Some lenders offer interest only mortgages for borrowers who are approaching the end of their term, especially if you have significant equity in your property and still have a strong income, or retirement income. You’ll need to show the new lender how you plan to repay the capital at the end of the new term. This could include investments, savings, or downsizing.
Lending criteria can vary quite a bit, particularly around age, income, and repayment vehicles. Some lenders are more flexible than others, and that’s where working with a broker can make the difference.
Choosing to take out a new interest only mortgage may give you more time and breathing room. However, it’s essential to make sure it aligns with your long-term plans and may not always be possible, or suitable. Professional advice should always be taken.
Option 4: Consider Equity Release
For some homeowners, an equity release may be worth considering if you’re over 55 and have sufficient equity in your property. A lifetime mortgage lets you borrow a portion of your home’s value, which is repaid when the property is eventually sold, which is often on passing away or going into long term care.
This can be used to clear your existing interest only mortgage without making monthly payments, although some will allow you to pay monthly to avoid interest roll-up.
However, it’s not suitable for everyone and should be considered carefully. Equity release can affect inheritance if you do not make payments and your entitlement to means-tested benefits if you are releasing equity from the home.
At Kerr & Watson, we take a holistic approach and will only recommend equity release if it’s clearly the right fit for your circumstances.
Option 5: Sell Your Property
If staying in your home isn’t essential or financially viable, selling the property might make sense. You can use the proceeds to repay your mortgage and, in many cases, downsize or relocate. It may still be possible to take a smaller mortgage to help with this but it may not be suitable or appealing having just got to the end of another mortgage term.
It’s not always an easy decision emotionally, but it can sometimes be the most practical solution. We often help clients evaluate the financial implications of selling versus staying, so they can move forward with clarity.
What If You Do Nothing?
If you reach the end of your mortgage term without a repayment strategy, your lender will ask for the full capital amount. If you cannot repay, you may face repossession proceedings.
Lenders will usually write to you several times in the lead-up to the end of the term. It’s best to act before you reach the final six months, as this gives you time to explore your options without pressure. You should communicate regularly with your lender when in this situation as ignoring correspondence will be harmful.
Whatever your situation, it’s strongly recommended to get advice as early as possible. By doing so, you give yourself the best chance to make a well-informed decision and avoid unnecessary stress.
Conclusion
Coming to the end of an interest only mortgage term can be overwhelming, but you shouldn’t have to face it alone. From remortgaging and extending your term, to downsizing or switching to a later-life lending product, there are choices to be explored.
What matters most is taking action early. At Kerr & Watson, we’re committed to helping you look for the right solution, taking into account what’s possible based on your unique situation.
If your mortgage term is ending soon and you’re unsure what to do next, feel free to contact us.
