What happens at the end of an interest-only mortgage?

Couple reviewing their interest-only mortgage

The monthly payments on an interest-only mortgage can be considerably lower than those on a standard repayment mortgage. This can be a great option for homeowners who need to free up cash for other investments or are expecting a large sum of money in the future. But before taking the leap, it’s crucial to understand what happens at the end of an interest-only mortgage term.

At the end of an interest-only mortgage term, lenders expect total loan repayment. Typically, borrowers settle the debt by selling their home or using the proceeds from an investment plan or pension. If you can’t pay in full, it’s vital to talk to your lender to discuss repayment options.

In this article, I will explain what happens when an interest-only mortgage ends in more detail. For personalised mortgage advice, please contact Goldmanread. As mortgage broker, we can provide impartial guidance on the most suitable home loan for your circumstances.

How long do you have to pay off the loan once your interest-only mortgage ends?

Mortgages are taken out over a specific term, most commonly 25 years. At the date of expiry, the lender expects the mortgage to be fully repaid.

If a mortgage is structured on a repayment basis, i.e. where the mortgage payments include both interest and loan repayment, then the mortgage will eventually be paid off by the time the term comes to an end.

With an interest-only mortgage, you do not pay off the loan capital monthly, only the interest. The lender will expect you to repay the whole loan amount via a pre-agreed repayment plan, e.g., the sale of the property (or second property), from the proceeds of an investment plan or a pension lump sum.

Lenders generally expect the loan to be settled on the date of expiry, and they will send reminders in the months leading up to it.

What are your repayment options for interest-only mortgages?

In order to borrow on an interest-only basis, lenders insist on having a robust repayment vehicle to settle the outstanding balance at the end of the term.

Acceptable repayment plans include:

  • Sale of the mortgaged property
  • Sale of a second property or properties (e.g. buy-to-let property or second home)
  • Investment proceeds – this can be from an ISA or other form of planned investment.
  • Pension lump sum

The types of repayment strategies which are generally unacceptable include the following:

  • Expected inheritance
  • Sale of business
  • Annual bonuses (although there are a small number of lenders who may accept this)

What if you can’t pay the lump sum after the interest-only mortgage ends?

If you can’t fully repay the original loan at the end of the mortgage term, the mortgage lender may expect you to sell the property in order to pay off the debt. If you find yourself in this situation, it’s important to get the advice of a financial adviser and speak to your mortgage lender as soon as possible.

Depending on your age and financial situation, you may be able to negotiate repayment with your current lender by switching to a repayment mortgage. However, this is not guaranteed, and lender forbearance should not be relied upon.

Another option may be to take out a new mortgage with another lender on a capital repayment basis.

To learn about part interest part repayment mortgages, read our blog.

1) Selling and downsizing

If you are unable to repay your interest-only mortgage at the end of the term, the lender will usually expect you to sell your property and downsize to a more affordable home.

While downsizing may seem like a good option when you first take out a mortgage, consider what would happen if your personal circumstances changed.

Would you be able to pay the loan off if your planned repayment vehicle fell through? Also, for some homeowners, the decision to sell is very hard to accept once they have become attached to their home.

For this reason, it’s important to consider an interest-only mortgage very seriously and consult an experienced mortgage broker for advice.

2) Switch to a lifetime mortgage

Some homeowners, depending on their age and circumstances, may be eligible to switch to a lifetime mortgage. Lifetime mortgages are a type of equity release product where homeowners can release funds from the value of their property without making regular repayments.

The loan, plus interest, is typically repaid from the sale of the property upon the homeowner’s death or move into long-term care.

If you require advice on releasing equity in this way, Goldmanread can refer you to a suitably qualified adviser.

3) Switch to a capital repayment mortgage

You may have the option to switch to a capital repayment mortgage with your existing lender at the end of your interest-only mortgage term. Whether you qualify largely depends on your age and whether you have sufficient time left to make affordable monthly repayments. Alternatively, you could look to remortgage with a new lender.

4) Extend your interest-only mortgage term

Generally speaking, lenders are reluctant to extend the term of an interest only mortgage unless there is a clear plan in place to fully repay the loan. Most lenders tend to offer a lower maximum term on interest-only mortgages than on repayment mortgages. For example, lenders who offer a capital repayment mortgage up to age 75 may only offer interest-only mortgages up to age 70.

However, it may be possible to extend the term of an interest-only mortgage, depending on your age and how long you have left on the mortgage.

Looking for mortgage advice? Get in touch with Goldmanread today

If you are seeking the flexibility of an interest-only mortgage, talk to the experts at Goldmanread. As experienced mortgage brokers, we have the knowledge to guide you on the advantages and disadvantages of a repayment vs interest-only mortgage deal based on your unique circumstances. Call us today to get started.

Frequently asked questions about interest-only mortgages

Can you sell the property at the end of an interest-only mortgage?

Yes, selling the property is the preferred repayment method for many mortgage lenders. If you are selling in order to move home, you will have to repay the mortgage in full first before you can take the equity and move on.

What happens if your home decreases in value?

If you find you are in negative equity at the end of an interest-only mortgage, i.e., the debt is worth more than the equity in your property, you may be able to negotiate new repayment terms with the lender.

However, this is by no means guaranteed, and it’s essential to obtain advice from a professional financial adviser in this scenario.

What is the longest term for an interest-only mortgage?

The longest term available for an interest-only mortgage depends on the provider. Generally, terms are shorter than on a capital repayment basis, typically 25 years. Lenders may also require a maximum age, typically 70 years.

What is a retirement interest-only mortgage?

Unlike standard interest-only mortgages, a retirement interest-only mortgage is paid off when certain events occur, such as the homeowner’s death, relocation to long-term care, or sale of the property. With this type of mortgage, borrowers are typically only required to demonstrate their ability to afford the monthly interest payments.

Retirement interest-only mortgages can be appealing for older homeowners as they provide flexibility in managing finances while allowing them to remain in their homes. It’s important for borrowers to carefully consider the terms and implications of such mortgages and seek advice from a qualified financial adviser before proceeding.

Picture of Clive Read
Clive Read

Clive Read is an appointed representative of PRIMIS Mortgage Network. PRIMIS Mortgage Network is a trading style of Personal Touch Financial Services Ltd which is authorised and regulated by the Financial Conduct Authority.

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