When it comes to mortgages, there are a lot of things to consider. But one of the most important is what will happen when your mortgage term ends.
If you have an interest only mortgage, your monthly payments will only cover the interest charged on the loan. At the end of the term, you’ll still owe the same amount that you originally borrowed.
So it’s extremely important to have a plan in place for how you’ll repay the full amount you owe at the end of your mortgage term.
Let’s take a look at interest only mortgages and the options you have for repaying them.
What is an interest only mortgage?
An interest only mortgage is a type of mortgage where your monthly payments only cover the interest on the loan.
Interest only mortgages are often used by people who are planning to sell their property before the end of the mortgage term. This is because they can keep their monthly payments low by only paying the interest on the loan
It’s also common for people to switch to an interest only mortgage if they’re having difficulty affording the repayments on a repayment mortgage. As you are only paying just the interest your mortgage balance does not decrease. So if you initially borrowed £200,000 on an interest-only basis, at the end of the mortgage you will still owe £200,000.
A history of interest-only mortgages
Interest-only mortgages were extremely popular in the years leading up to the financial crisis of 2008. Lending rules were more relaxed and in 2006, 45% of all new mortgages were interest-only.
They were popular because they offered a way for people to keep their monthly mortgage payments low. This made it easier for people to afford a bigger property, especially at a time when house prices were rising rapidly.
For anyone who had previously taken out an interest-only mortgage, it is likely that you will have been advised to set up a repayment vehicle to repay the mortgage at the end of the term. This could be an endowment policy, ISA or pension.
When the financial crisis hit in 2008, it had a big impact on interest-only mortgages. House prices fell sharply, and many people found themselves in negative equity. This meant that they owed more on their mortgage than their property was worth. And with monthly repayments only covering the interest, their mortgage balance wasn’t reducing.
For many people struggling to keep up with their repayments, this created a real problem. There was a big rise in the number of people falling behind on their mortgage payments and ultimately losing their homes.
This led to a big change in the way interest-only mortgages were offered by lenders. Now, most lenders will only offer an interest-only mortgage if you can demonstrate that you have a suitable repayment plan in place to repay the mortgage at the end of the term.
Why do people choose an interest-only mortgage?
There are a few reasons why people might choose an interest-only mortgage.
As we’ve already mentioned, one of the biggest reasons is to keep monthly repayments low. This can make it more affordable for people to buy a bigger property or invest in a buy-to-let property.
Another reason is that it can be a good way to manage your cash flow. If you have other debts or financial commitments, you might find it easier to budget if your mortgage repayments are lower.
If you are only going to have the mortgage for a few years, before selling the property, then you might prefer to have the lower monthly interest only payments.
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Is it still possible to have an interest-only mortgage?
It is still possible to obtain an interest-only mortgage, but it has become much harder since 2008. Lenders are now much stricter about who they will lend to and what type of repayment plan you have in place.
Most lenders will only offer an interest-only mortgage if you can demonstrate that you have a suitable way of repaying the mortgage at the end of the term. You will also need to have a decent deposit as lenders don’t like high LTV for this loan type.
If you’re thinking about taking out an interest-only mortgage, it’s important to speak to a mortgage adviser first to find out if you meet the criteria.
Our guide to interest only mortgages covers the topic in more detail.
What can I do if my interest-only mortgage is ending?
If you’re coming to the end of your interest-only mortgage, you need to start thinking about how you’re going to repay the mortgage. Your lender will write to you a year before it is due to finish to remind you and explain the process.
They will then send you another reminder after six months and another shortly before the final date.
Hopefully you will have been putting money aside to put towards the mortgage, or maybe you will sell up and move to a cheaper property.
It’s important to speak to your lender about your options and make sure you understand the terms of your mortgage before making any decisions.
What happens if I can’t repay my mortgage?
A mortgage is a loan that is secured against your home. If you’re unable to repay your mortgage, the lender would eventually take possession of your property. This is known as ‘repossession‘.
It’s important to remember that repossession is a last resort for lenders and they will only do this if you have failed to keep up with your repayments and have not been able to repay the mortgage within a reasonable timeframe.
Depending on your age and employment status, you may be able to persuade the lender to extend the mortgage for a few more years to give you some extra time.
If this is not possible then you might want to consider remortgaging to a new lender. If at this point, or during the mortgage term, you will be 65 or over then you will find it more difficult to get accepted for a mortgage. This is known as lending in retirement and it’s not offered by all companies.
The mortgage options open to pensioners are growing, as lenders recognise that we are living and working longer.
Another option is to consider an equity release mortgage. This will allow you to stay in your home and to stop making monthly payments. You need to speak with a qualified adviser before taking out an equity release plan or lifetime mortgage. Eligibility is affected by your age, property type and loan to value.
Can I sell my house if I have an interest only mortgage?
Yes, of course, but the amount you owe on the mortgage will be taken from the sale proceeds and you will receive what’s left.
Can you get equity release on an interest only mortgage?
Equity release mortgages are available to homeowners aged 55 and over. There are no monthly payments and no repayment term to worry about. The lender will charge interest each month and this is added to your mortgage balance.
Can I get an interest only mortgage at 60?
This very much depends on your situation. If you need the mortgage but have other assets and property as a means of repayment then it is likely that you will be approved for a mortgage.
Can I change my interest-only mortgage to repayment?
Yes this is possible. Speak with your lender to see how this would work and what the new monthly repayments would be. It may also be possible to change to a ‘part and part‘ mortgage which is somewhere between a full repayment and interest only.
