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Paying Back An Interest-Only Mortgage At The End Of Its Term

Interest-only mortgages are very appealing, as they enable people to afford a property by only paying off the interest over the term of the loan. 

At the end of this, the equity needs to be paid off, which normally happens when the homeowner sells the property. 

However, if they want to remain in the house, this might cause a few problems. 

What is an interest-only mortgage?

Interest-only mortgages are typically offered to buy-to-let investors, as it reduces their monthly outgoings, meaning they can keep more of their rental income. 

When they sell the property, they then pay the financial provider back the price they originally bought it for with the proceeds.

For instance, if they bought a house for £120,000, this is how much they would give back to the mortgage company when they sell it, even if it has doubled in value and is now worth £250,000. This also allows them to earn a tidy profit of £130,000 from its increase in value. 

Repayment mortgages are different and are typically given to owner-occupiers. These involve paying not only the interest on the mortgage, but also some of the value of the property.

Therefore, by the end of the term, whether it is 20, 25 or 30 years, the homeowner would have paid the £120,000 plus all the interest they owed to the bank. If they then sell it for £250,000, they can keep this cash for themselves. 

The issue for interest-only mortgages comes when owners reach the end of their term but do not want to sell their asset. 

Managing your interest-only mortgage

There are various ways you can go about managing your interest-only mortgage over the term of its lifetime. For example, you could consider overpaying when you’re able to as this will reduce the amount you owe, as well as the interest you’ll pay on the loan.

Common ways to pay back these types of mortgage include selling your home, switching to a capital repayment mortgage, making overpayments, using savings, pension lump sums and equity release.

What to do if you cannot afford your house at the end of the loan?

Unfortunately, the difficult economic situation, with soaring energy and food prices and mortgage rates, has meant that many people have been unable to save as much as they hoped over the last couple of years.

Therefore, if you live in a property with an interest-only mortgage and the loan is coming to the end of the term, you might be facing the conundrum of needing to pay off the house but not having the spare cash to afford it. 

BTL landlords who do not reside in the home have the option of selling it, and using this money to pay back the mortgage provider.

Although house prices have been declining lately, and have dropped by 3.2 per cent over the last year alone, they are still likely to be higher than when they bought the property if they purchased it years before. 

Indeed, the average house price is still £40,000 above pre-pandemic levels, so there is a good chance the sale of the property will cover what they owe on repayments. 

If, however, the value of the house has fallen since it was bought, the owner will still need to dig into their savings or take out another loan to fully reimburse the mortgage provider. 

Those who aren’t BTL landlords with an interest-only mortgage and want to continue living in the property need to find an alternative way to raise the funds.

1. Call the lender

It is a good idea to contact the mortgage provider as soon as you can, so they are made fully aware of your financial position. 

They might be willing to extend the term of the loan, helping you to stay in the property for longer. 

Unfortunately, this is likely to mean the monthly payments will go towards paying more interest on the asset instead of reducing what you owe on the home.

2. Take out a repayment mortgage

Alternatively, you could contact a mortgage broker to find out whether you have a good chance of being given a repayment mortgage for the remainder that you owe. 

This might be harder the older you are, as the term of the mortgage will be shorter, but it is worth seeing what is available if it lets you remain in your house. 

If you think you want to stay in the property indefinitely, you might want to consider a retirement interest-only mortgage. This enables you to pay off the interest until you either move into a care home or die, after which the property is sold and the sale reimburses the financial provider.

This option means homeowners do not have to worry about having to move out. However, it means they will forever be paying off interest on the loan, and will not be able to leave as much inheritance to their loved ones as they might have hoped. 

3. Move out

Although many people do not like the idea of moving out of their home, this could be their only realistic option if they do not want to keep paying for a mortgage.

By choosing a cheaper property or downsizing, the sale of their house could pay off their loan, as well as mean they can live in their new home mortgage-free, which could provide them with a huge sense of financial relief. 

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