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Interest-only mortgages allow you to take advantage of lower monthly payments throughout the agreement, but what happens when the term ends, and what options do you have if you can’t settle the debt? Read on to find out…
What happens at the end of an interest-only mortgage?
When your interest-only mortgage is due to end, your lender will write to you in advance to prompt you to pay the capital debt before sending your final redemption quote. This would usually be settled with the repayment vehicle you evidenced when you entered the deal.
At the end of many interest-only agreements, the full capital debt is still outstanding since only the interest was paid during the term. In some cases, however, the borrower might have made optional capital repayments, leaving just some of the original debt to pay.
Your repayment vehicle will need to provide enough capital to settle the remaining amount of capital debt, unless you have other funds that could supplement it. Once you have made this payment, your mortgage account will be closed and you will own your home outright.
If your repayment vehicle has failed to raise enough funds and you have no other capital to pay the debt, you are at risk of becoming a ‘mortgage prisoner’. If you find yourself in this situation, keep in mind that you could have a range of different options and a way out.
What are your options if you can’t pay your mortgage?
If you are reaching the end of an interest-only mortgage agreement and don’t have the capital to pay the outstanding debt, there are usually options to explore. They include:
Extending the mortgage term
Most mortgage agreements are taken out over 25 years, but there are lenders who offer terms of 40 years or longer. If you are reaching the end of a standard mortgage term and need more time for your repayment vehicle to pay out, a term extension could buy you that, and you won’t necessarily need to go through the remortgage process for this.
You might, however, need to consider remortgaging to a new lender if your current mortgage provider does not offer term lengths long enough, or declines your request.
Switching to capital repayment
This option can potentially be done in conjunction with a term extension or without one, depending on how much capital debt you will need to repay at the end of the agreement.
If you know long enough in advance that your repayment vehicle is set to fail, you could change your mortgage type to capital repayment and chip away at the debt monthly.
A remortgage may not be essential in this scenario, but you may wish to consider whether there are other lenders out there willing to offer you a better deal on a repayment mortgage.
Retirement mortgages
If you are over the age of 55, switching to a specialist retirement deal such as a lifetime mortgage (equity release) or a retirement interest-only mortgage could be an option. For this to be viable, however, you would need to have paid off at least some of the capital debt on your mortgage during the term, as retirement mortgages are secured against home equity.
- Read more about lifetime mortgages in our standalone guide
- Read more about RIO mortgages in our standalone guide
Sell up and downsize
The sale of the mortgaged property is considered a viable exit strategy by some interest-only lenders. Depending on the value of your home and whether you hold any equity, it may be possible to downsize and purchase a less expensive property with the sale proceeds.
Connect with an interest-only mortgage expert
What to do if you think you were mis-sold an interest-only mortgage
Some borrowers who find themselves in a situation where they are unable to repay an interest-only mortgage at the end of the term have grounds to complain against the mortgage lender or broker who recommended the agreement to them.
You may have grounds to complain if:
- You feel an interest-only mortgage was the wrong product for you
- Your lender or broker did not explain how they work clearly
- You were sold an endowment policy alongside the mortgage and it didn’t pay out
According to the Financial Ombudsman Service (FOS), it receives 300 to 400 complaints about mis-sold interest-only mortgages each year and upholds around one in five of them.
If your mortgage is found to have been mis-sold, you could be due compensation.
Full details about how to complain can be found on the FOS website.
What happens at the end of an interest-only buy-to-let mortgage?
Most buy-to-let mortgages are taken out on an interest-only basis, and at the end of the term, the full capital debt is due, just like it would be with a residential mortgage.
The rules around repayment vehicles are less stringent in the buy-to-let sector, so most landlords choose one of the following options to pay the debt:
- Sell the property
- Remortgage
- Extend the term of their existing mortgage
- Switch to a repayment buy-to-let mortgage
If you are a landlord who is hoping to retain their buy-to-let property beyond the mortgage term, speak to one of our mortgage brokers to go over all of your options.
How we can help you
If you are approaching the end of an interest-only mortgage term and are unsure what to do, our brokers can go through all of your options with you and offer bespoke advice.
Our interest-only mortgage specialists can help you do the following:
- Remortgage onto a more suitable deal
- Switch to a specialist retirement mortgage product
- Establish whether your mortgage was mis-sold
- Find the best solution if you have an expiring interest-only buy-to-let mortgage
Ready to take advantage of a free, no-obligation chat with a broker who specialises in interest-only mortgages to review your options? Get started here.
FAQs
Yes. Having an interest-only mortgage secured against your home won’t stop you from selling it. The proceeds from the sale will be used to settle the mortgage debt, and if you hold any equity in the property, that capital will be yours to keep or invest elsewhere.
Choosing an Adviser
Selecting a qualified and experienced mortgage adviser is of great importance. To choose a suitable adviser, evaluate their qualifications, experience, and reputation, and ensure they are regulated by the Financial Conduct Authority (FCA).
Read reviews from previous clients and make sure they provide a clear explanation of the products and services they offer, as well as the fees and charges associated with them.