If you have an interest-only mortgage that you are struggling to pay off, you’re not the only one. Many borrowers feel overwhelmed when the final payment becomes due, and they realise they don’t have the means.
While the situation is certainly difficult, solutions do exist. The key is acting promptly to address it pragmatically and seek expert help if needed. With that in mind, we’re equipping you with practical steps to manage your situation responsibly, weigh up your options, and find a suitable solution.
What is an interest-only mortgage?
An interest-only mortgage is a type of home loan where, for a set period of time, your monthly payments only cover the interest building up on the loan and none of the principal balance. This makes payments lower in the short term and is particularly popular with landlords on buy-to-let properties.
At the end of the interest-only period, however, you are required to repay the full principal amount borrowed (sometimes referred to as a “balloon payment”). This final payment can be quite substantial, which many borrowers struggle to meet.
Do I have to pay my interest-only mortgage at the end of the term
Yes, at the end of an interest-only mortgage term, you do have to repay the original principal loan amount, not just the interest. This final payment due is normally the full amount borrowed.
You may, however, be able to extend your interest-only term instead of having to pay off the whole loan immediately. To do this, you will need to apply for a new arrangement with your existing lender or remortgage with a new one, typically for an additional five to ten years, whereby you will continue paying just interest on the loan.
Your lender will perform affordability checks and may require you to switch part of the mortgage onto a repayment basis where some principal is gradually paid off monthly. This can spread out the final payment into more manageable chunks.
Can I use equity release to pay off my mortgage?
Equity release plans allow homeowners aged over 55 to access to some of the equity built up in their homes without having to move. This capital sum could potentially help pay an outstanding interest-only balloon payment that’s due.
Since, with an interest only mortgage, you do not pay off the principal, it’s quite likely that you will not own a huge amount of equity in the property, so there may not be much equity to release. Assuming that you’ve only ever paid interest since the property was purchased, your only equity would be the current value of the property minus the loan amount owed. You should get your property valued by a surveyor to learn what the current value of the property is.
It’s also worth bearing in mind that equity release comes at a steep price, and you usually won’t own your home in the end. These types of mortgages accrue interest until the property is sold, eating into any remaining equity value.
Equity release may also disqualify you from mortgage payment assistance like Support for Mortgage Interest loans. Therefore, it’s wise to consider whether losing ownership of your home is worth eliminating any interest-only mortgage worries before pursuing this route.
Can I sell my property to pay off the mortgage?
If your interest-only mortgage is on a buy-to-let or investment property, selling to cover the outstanding balance due may be an attractive option since it doesn’t involve giving up your own home.
As a landlord, you also likely have more financial upside — any equity accrued in the property over time through appreciation could mean you stand to make a profit from the sale after repaying your mortgage, depending on current market prices.
Such capital could provide a helpful nest egg. Just be aware that you may owe capital gains tax on the sale if the property value has appreciated since the purchase. Still, you avoid repossession risks and walk away mortgage-free.
What options do I have to sell my property?
Selling your property to cover an outstanding interest-only mortgage balance can be done in a few different ways:
The typical route is listing with a local estate agent. They market the property and facilitate viewings across their network, online portals and with potential buyers directly. Your home is exposed to the widest possible buyer audience, but it does mean only pocketing the sale price minus the agent’s fees, which are typically 1-3%. Moreover, sales are dependent on market appetite, and it can take three to six months for a sale to go through once an offer has been accepted.
Putting your home up for auction can speed up the sale process, usually taking just four to six weeks from listing to exchanging contracts. It’s not quite that straightforward, though, and comes with the risk of failing to attract the price you hope for or even reaching the reserve price. Research guide prices and the auctioneer’s terms and conditions if you go down the auction path.
Property Rescue can buy your home with zero fuss in as little as 48 hours. We handle the entire process, and there’s no need to worry about your home potentially spending months on the sales market. Our team is on hand to answer any questions you may have, meaning there’s no stress for the seller. Selling to Property Rescue can be particularly beneficial if your interest-only mortgage is drawing to its end and you want to use the sale of the house to pay the outstanding balance.
Summary: Paying off an interest-only mortgage
While coming up with an outstanding interest-only mortgage balance can seem an impossible feat, take hope. Practical solutions exist, from equity release to property sales. Get a free, no-obligation quote with Property Rescue and see how much we can buy your property for so you can pay off your interest-only mortgage.