What happens at the end of an interest-only mortgage?

At the end of an interest-only mortgage term, you will usually have to repay the capital balance owed on the mortgage with your repayment vehicle.

In this brief guide, we will cover what happens at the end of an interest-only mortgage term and what your options are.

Some of the most common repayment vehicles include:

  • Unit trusts
  • Investment bonds
  • Pensions
  • Endowment policies
  • Stocks and shares
  • ISAs

There are a few options you may have when your interest-only mortgage comes to an end. We briefly go into some of those options below.

Using the equity from a property to pay off your interest-only mortgage

If you have more than one property then you could potentially remortgage to release equity from an unmortgaged property pr a property which has a lot of equity in it, maybe due to rising house prices. You could then use the funds received from this equity to pay the full balance or some of the balance for the interest-only mortgage as it comes to an end.

Sell the property and downsize

You may also be able to sell the property and downsize to a much smaller one. This will likely give you enough capital to repay the balance on the interest-only mortgage as it ends or enough balance to repay most of the interest-only mortgage as it ends.

You should be aware that when you attempt to get a new mortgage on the much cheaper property, the mortgage lender will put you through their mortgage affordability requirements and you will need to demonstrate that you will be able to keep up on your mortgage payments if you have your interest-only mortgage still requiring you to make monthly mortgage payments.

Remortgage your interest-only mortgage with a different lender

You may be able to remortgage your interest-only mortgage to a new mortgage lender when your interest-only mortgage ends or is about to end.

The new mortgage lender will take you through their mortgage affordability requirements to ensure you can still afford the monthly mortgage repayments.

The new mortgage lender will also want to see that your repayment vehicle is still on track to repay the balance which is outstanding.

After remortgaging if you get a cheaper rate then you may be able to save some money up and overpay your mortgage to reduce the balance outstanding.

Can you remortgage your interest-only mortgage if you have bad credit?

Getting a remortgage at the end of your interest-only mortgage with bad credit may be much harder but you will simply have to see what the mortgage eligibility requirements of the mortgage lender are. Some mortgage lenders will lend to borrowers with bad credit issues on a case by case basis.

If it was a CCJ which was satisfied and is a certain age then some mortgage lenders may be willing to lend. Other mortgage lenders may lend if the CCJ was a maximum amount.

When looking to get a mortgage with bad credit the requirements from different mortgage lenders will differ and a bad credit mortgage broker may be able to assist you.

Bad credit could include:

A CCJ

An IVA

A debt management plan

A default

A bankruptcy

A home reposession

Extend your interest-only mortgage term

You may also choose to instead get an extension on your interest-only mortgage term rather than pay off your interest-only mortgage at the end of the mortgage term.

An interest-only mortgage lender will agree to extend your interest-only mortgage term if they are confident that you will be able to continue making the monthly mortgage repayments.

The interest-only mortgage lender will also usually want to see the repayment vehicle being used and to ensure it is still on track. If it isn’t, then the mortgage lender will deal with this on a case by case basis.

If you are approaching 75 then you may find it much harder to find a mortgage lender who is willing to extend an interest-only mortgage when it is nearing its end.

Switch to an equity release product

You may be able to switch your interest-only mortgage to an equity release product if you are eligible for an equity release product. This could be possible with a third-party equity release lender but may be easier to do with the same mortgage lender who has your interest-only mortgage which is about to come to an end.

Equity release products could be home reversion plans or lifetime mortgages.

With an equity release product, you may still have to make a monthly interest mortgage payment to the mortgage lender depending on the type of equity release product you choose.

The balance outstanding on an equity release product is paid off when you die or move into a care home by the mortgage lender selling your home to recoup the balance.

The mortgage lender will then pay any remaining money to your estate.

Use your savings or borrow from family

Another option you may have when your interest-only mortgage is about coming to an end will be to borrow money from your family to pay off the capital balance or use any savings you may have to pay off the balance outstanding.

Switch to a repayment mortgage

Repayment mortgages will reduce the balance outstanding as the monthly mortgage repayments contain both interest and capital repayments.

This can be a good option when your interest-only mortgage ends or is about to end as it will ensure you begin to repay the balance which was outstanding.

You will have to find a mortgage lender who is willing to lend to you and meet their mortgage affordability requirements.

John Bate

John has 22 years of experience in financial services. This spans across financial research, financial services (As a qualified mortgage broker and underwriter), financial trading and sales at global investment banks. While working as a publishing research analyst, he covered European bank credit and advised institutional clients on investment strategies at both JP Morgan and Societe Generale. John has passed all three levels of the CFA (Chartered Financial Analyst) programme.