Interest-only mortgages are often an attractive proposition for many people. Only paying the interest on your mortgage makes the monthly repayment significantly lower than if you are also paying off the principal loan.
However, the fact that you are solely making interest payments means that you are not building up any equity in your property during that period, and you are not reducing the principal amount that you originally borrowed.
Some interest-only mortgages last the entire duration of your mortgage, at which point you have to pay back the full principal loan.
Others are structured to have a fixed rate interest-only repayment for an agreed number of years, known as the introductory period. At the end of that introductory period, you start repaying the principal and the interest, which will be a variable rate.
Our experienced mortgage advisers at PIL Southampton are dealing with these types of mortgages every day.
So, let’s look at what happens when an interest-only mortgage comes to an end.
Some people choose to sell their home to repay the principal amount of the mortgage they took out. This would only be a viable option if the proceeds of the house sale are at least equal to the amount you need to pay back.
If you will have a substantial amount of equity left over after you have repaid your principal sum, you may decide to downsize and buy a smaller property outright.
Others choose to refinance their loan with a capital repayment mortgage when their interest-only mortgage term comes to an end.
This will be a new mortgage, typically with a 10-20 year repayment term. The products you are offered will depend on several factors, including your property value, how much you still owe, your income and your age.
Note: If you are an older borrower or on a low income, it could be difficult to get another interest-only mortgage. Your lender will want to see a robust plan for how you plan to pay off the principal loan amount when the time comes, and you are unlikely to meet the mortgage affordability criteria unless you can prove you have a generous pension or other financial means lined up.
There will be other borrowers who will have used another type of saving, like a pension, ISA, investment bonds etc, to accumulate enough funds to pay off the principal amount of their mortgage.
It can be harder for the over 50s to get a typical mortgage offer approved. As there is an increasing demand in this area, and there have been some favourable regulation changes, some mortgage lenders are now offering new types of mortgages especially designed to see their clients who are over 50 through the retirement phase of their lives.
Two of these specialist mortgage products are:
Term Interest-Only (TIO) – an exclusively designed interest-only mortgage for the over 50s, that allows clients to get a new interest-only mortgage deal with a five-year-plus term.
Retirement Interest-Only (RIO) – this is a new type of interest-only mortgage aimed at the over 55s. It works in the same way as a regular mortgage and your lender repays your current interest-only mortgage.
If you are over 55, you can use an equity release mortgage to release tax-free money from your home. That money will then be used to repay your current interest-only mortgage in full.
The vast majority of people will choose the ‘lifetime mortgage’ type of equity release plan, where they maintain full ownership of their property.
For a very small number of clients with particular specific circumstances, the ‘home reversion scheme’ type of equity release plan will be suitable. In this situation, you choose to sell your property but stay living in your property until you die or until you go into long term care.
You could arrange an extension of your interest-only mortgage term by postponing the repayment date. This can be a helpful option if you know you have a substantial amount of money coming your way at a certain date in the near future, like an inheritance or a bonus.
If you don’t have enough savings and investments built up, and you don’t want to sell up to clear your debt, you could speak to your current lender about switching to a repayment mortgage or switch a portion of your current mortgage to a repayment mortgage, leaving the remaining portion interest-only.
This should reduce the increase in your new mortgage payments, compared to moving the whole balance to a repayment mortgage.
You could also shop around, preferably with a mortgage broker’s expert guidance, to see if you can get more affordable terms with a new lender.
In the worst case scenario, if you are unable to secure a new mortgage, your lender could repossess your property. And, if that still doesn’t provide enough funds to recoup the full amount, you will be liable for the remaining debt.
Our expert and specialist team of mortgage advisers has a huge amount of experience in this area. We will be happy to find the best deals available to suit your circumstances, for when your interest-only mortgage period comes to an end, and we can help you make the best decision for you.
Tip: We recommend that you start working with a mortgage broker to research and discuss your options at least six months, and preferably 12 months, before your interest-only mortgage period comes to an end.
Our friendly, knowledgeable mortgage advisers are here to guide you through the mortgage process, every step of the way. You can email us, fill out the contact form on our website or call us on 02380 668407. We look forward to hearing from you.