With an interest-only mortgage, you only pay the interest each month, not the capital. As a result, your monthly payments are lower than with a repayment mortgage. But when the mortgage term ends, you’ll need to pay back the full amount you originally borrowed.
Many homeowners approach the end of their interest-only term without a clear plan for repaying this lump sum. Knowing your options now can help you avoid consequences later, including the risk of losing your home.
What happens when your interest-only mortgage ends?
When your interest-only mortgage reaches the end of its term, your lender will expect you to repay the entire outstanding balance. If, for example, you borrowed £200,000, you’ll need to pay back £200,000, regardless of how many years you’ve been making interest payments.
Most lenders will contact you well before your mortgage ends to check your repayment plans. If you can’t repay the full amount, you risk having your home repossessed.
Common problems homeowners face at the end of interest-only mortgages
Many people reach the end of their interest-only mortgage term facing the challenges of how they’re going to pay back the amount. Some of these include …
- Not having a solid repayment plan in place
- Savings or investments that haven’t grown enough to cover the loan
- Being too old to qualify for a new mortgage
- Poor credit history limiting remortgage options
- House prices that haven’t increased as much as expected
What are your options when an interest-only mortgage ends?
Fortunately, there are ways to pay off your interest-only mortgage at the end of its term and put a plan in place so you don’t get caught out.
Pay off the loan in full
The simplest solution is to use savings, investments or pension funds to pay off the mortgage. It’s often seen as the ideal scenario because it secures your ownership and stops further interest payments.
Sell your property
Selling your home allows you to clear the mortgage debt. If your property has increased in value, you might have enough equity left over to buy somewhere smaller outright or with a smaller mortgage.
Traditional sales through estate agents can take months to complete. If your mortgage end date is approaching quickly, Property Rescue offers a much faster alternative. We can exchange contracts in as little as 48 hours and complete the purchase within a week (if needed) while covering aspects like the legal fees. This way you can pay the mortgage debt and pocket all the profit if the property has increased in value since you bought it..
Switch to a repayment mortgage
Some lenders will let you convert to a repayment mortgage to pay off the debt gradually. Monthly payments will be significantly higher as you’ll now be paying both interest and capital. Your age and income will determine whether this is possible. Most lenders won’t extend mortgages beyond retirement age.
Remortgage with another lender
If your current lender won’t extend your term, you might find another lender who will. Options include getting a new interest-only mortgage (though these are harder to get now). You could go for a retirement interest-only mortgage (RIOs) if you’re an older borrower. Or there’s the option of part repayment, part interest-only arrangements.
Equity release (for over-55s)
If you’re over 55, equity release lets you access the value in your home without moving. The most common type is a lifetime mortgage, where you borrow against your home’s value. The loan and interest are repaid when you die or move into long-term care.
You can stay in your home with no monthly payments, but it reduces what you can leave to family and can be expensive long-term.
What to do before your mortgage ends
Don’t wait until the last minute to address an ending interest-only mortgage:
- Contact your lender early: A year beforehand should be fine.
- Review your finances and repayment options
- Get independent financial advice about remortgaging or equity release
- If you can’t repay and need to sell quickly, get a free, no-obligation quote from Property Rescue. We can purchase your property fast, allowing you to clear your debt and move on
Taking action early will give you more control over the outcome and potentially help avoid the stress of last-minute decisions.