Speak to an expert
Michelle is an award-winning chartered financial planner who holds the designation 'Fellow of the PFS' demonstrating her commitment to maintaining the highest standards of knowledge, ethical conduct, and professional practice. Michelle is also an accredited member of the Society of Later Life advisers. Michelle offers a fully personalised service tailored to each clients individual needs and goals, using an approach that was recognised and honoured by the Women in Financial Advice awards in 2021. Clients working with Michelle can expect a high level of professionalism, integrity and a lasting relationship built on trust and open communication
Michelle Boakes
Chartered Financial Planner
Body
What happens when you come to the end of an interest only mortgage?
If you have an interest only mortgage, your monthly payments will have just been paying the interest on your loan. You won’t have reduced your mortgage balance, unless you have been making overpayments.
So when you reach the end of your mortgage term, your lender is going to expect you to repay the whole outstanding balance. Your lender will start contacting you in the 12 months leading up to the end date. Most UK lenders will contact you on about three occasions, so 12 months, six months and probably three months prior to the balance being due.
If you’re having any problems repaying the balance, you should speak to your mortgage lender to see what assistance they can offer. Not repaying the balance and not contacting the lender may result in the repossession of your home, in a worst case scenario.
How long can you stay on an interest only mortgage? Is it possible to extend an interest only mortgage?
If you have a traditional residential mortgage, you will have agreed the mortgage term in advance. Generally, with interest only, this would coincide with a set maximum age from the lender.
When you’re nearing the end of that term you may want to extend. That is possible, but only with the agreement of your mortgage lender. You will need to fit within their criteria as well.
If you have a retirement interest only mortgage, that hasn’t got an end date. It will continue until you pass away, sell the property or go into a care home.
We offer fee free mortgage advice.
We do not charge our customers for any mortgage advice we are purely paid by the lender on completion.
How do you release equity from an interest only mortgage?
You can release capital if you have an interest only mortgage, subject to the mortgage lender’s criteria and their agreement. You can only do this if your house is worth more than the amount that you’re borrowing plus the outstanding mortgage amount.
In reality, your mortgage lender will limit how much you can borrow in line with your income and expenditure and their maximum borrowing limits. If you wanted to release equity, you would apply to a mortgage lender to borrow more than you owe. If that’s agreed and all the legal process goes ahead, the mortgage lender will release the funds to your solicitor. The excess over and above the mortgage amount will be transferred to you.
If you are keeping your mortgage with the same lender, which we call a further advance, then the funds would be released directly to you.
Do you ever own the property with an interest only mortgage?
Yes, you always own the property with an interest only mortgage. The mortgage lender has what we call a first charge over the property, which means that if you sell it, you have to pay them the amount you owe them before you get the money left over. You still own the property, but you have to pay that mortgage off first.
Is it better to overpay on an interest only or a repayment mortgage?
Overpaying your interest only mortgage reduces the amount of money that you owe – so at the end of the term you have a smaller balance to find to pay off the amount. Also, your monthly mortgage payments reduce.
Overpaying your repayment mortgage reduces the amount that you owe and also means you pay less interest over the whole term. You will also reach the end of your mortgage term quicker.
You can see from these two distinctions that they do the same thing – they reduce the amount of interest that you pay overall. With a repayment mortgage it reduces the length of time that you hold the mortgage. On an interest-only mortgage it reduces the amount you pay back at the end of the term. Neither way is better or worse. It’s more important to consider your own personal circumstances when you make the decision about what will be right for you.
We work with dozens of lenders including the high street banks and can compare their deals for you, always with your best interest at heart.
Can I sell a property with an interest only mortgage?
Yes, absolutely, You can sell your property with an interest mortgage, but your lender will be paid off first. Any remaining equity will be passed back to you.
How do I get out of my interest only mortgage?
There are several ways to get out of your interest only mortgage. You can remortgage onto a repayment mortgage, this means your mortgage payments will be higher but they will consist of both capital and interest payments, reducing the amount you owe.
Your mortgage lender must agree to it and you will undergo an assessment to see if you can afford it. You could also repay the balance by savings if you have enough funds or you could look to raise the funds by remortgaging onto a different mortgage for example, a retirement interest-only or a lifetime mortgage. However, These types of mortgages are only available to clients who meet certain criteria for example, being over the age of 55.
How do you calculate interest only on a mortgage?
In simple terms, you convert the interest rate being charged to a decimal. So if it’s 5% it would become 0.05. Then you multiply the amount of mortgage outstanding by that decimal figure. Then you divide that by 12 and the number of years left on the term.
That method assumes that you make no overpayments – because in reality the mortgage lender will calculate the amount of interest owed on a daily basis and then charge you that monthly. That involves a much more complex calculation than that simple one I’ve just given.
Can I get government help with my interest only mortgage?
There’s only one benefit that I know of that helps homeowners towards their mortgage payments. It’s called Support for Mortgage Interest – they shorten it to SMI. That’s paid to you as a loan which you then need to repay with interest when you sell your home.
To get this support, you need to be claiming qualifying benefits such as income support or jobseeker’s allowance, employment support allowance, Universal Credit or Pension Credit. It’s only available up to a maximum mortgage amount.
If you’re in a situation where you need some support, it’s worth looking into – but just be aware that it’s not a benefit. It is actually a loan that you pay back when you sell your property.
Is an interest only mortgage a good idea in your opinion? What are the advantages and disadvantages?
The main advantage is that your monthly mortgage payments will be lower than a comparative repayment mortgage. That lends itself to a few other advantages like having greater control over your investment. You decide how to save and repay the capital of your mortgage.
The disadvantage is that the capital is not reducing – so you’re paying interest on the full amount of mortgage you’ve borrowed, which means you pay a higher amount overall. Plus, you still owe the full amount of the mortgage at the end of the term, so you have to have a plan in place to repay the capital.
There is a higher amount of risk involved, especially if your repayment vehicle is performing badly. Overall, an interest only mortgage will be very advantageous for some, while for others it just won’t be – so it’s really important to consider personal circumstances when thinking about interest only.
Can I get an interest only mortgage at age 60?
Yes, it’s definitely possible to get an interest only mortgage at 60. When I see clients over the age of 55 I like to review all three options available to them – these include your traditional interest only mortgage, a retirement interest only mortgage and a lifetime mortgage.
Get in touch
We take away the stress and uncertainty of applying directly with a lender who may not have the most suitable deal for you.
Will the lender repossess my home? What are my options if I can’t repay the capital of an interest only mortgage?
In short, yes, the lender can repossess your home if you don’t meet the obligation to repay your capital. However, in reality I find most mortgage lenders are willing to work with clients to find a suitable solution for both of you.
If you’re in this situation, I cannot stress enough how important it is to talk to your lender and go to Citizens Advice. Make sure you’re getting all the help and advice and support that you need. It must be a very difficult time if you’re facing this, so reach out and get some support.
How can a financial advisor help?
Financial advisors help with all different options around mortgages and finances and we look at all of the options available to you. We help you consider whether it’s right for you now and in the future.
We look at the criteria and all the pros and cons and translate that into what’s right for you now – and what we think is going to change in the future for you.
In relation to interest only, we can also look at the term of the mortgage and how you can change it. If you’re coming up to the end of your interest only mortgage term we can look at how you can repay that mortgage, exploring the advantages and disadvantages of all of the solutions.
Warning Text
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE.
EQUITY RELEASE & LIFETIME MORTGAGES WILL REDUCE THE VALUE OF YOUR ESTATE AND CAN AFFECT YOUR ELIGIBILITY FOR MEANS TESTED BENEFITS.
Every episode is a gateway to new knowledge and endless inspiration!
Related podcasts
ESTATE PLANNING IS NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.
