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

Navigating your mortgage, especially if you are a first-time buyer can be a daunting task. So if you are considering an interest-only mortgage, it is important to understand what happens at the end of it and whether or not it will be beneficial to you.

interest only mortgage

Understanding interest-only mortgages

If you are about to enter an interest-only mortgage, you need to know what it entails. First of all, you should know that this method of mortgage is most suitable for first-time buyers. This is because it allows them time to defer payments to a later point when they expect their income will be higher.   

An interest-only mortgage can be beneficial however, it does have its caveats. 

First of all, income can be unpredictable. Your financial standings could change from when you started your mortgage. Lenders are willing to have mortgages last for up to 40 years and by this point, you may have even retired. If you are unable to pay your mortgage repayments, this could lead to your home being repossessed. 

Another option is also to make overpayments. This lets you reduce your outstanding loan if you have the money available through a pay increase or inherited money. 

Here’s a great video that breaks down mortgages allowing you to understand this form of loan and if the property is worth the investment:

Handling your Interest-only mortgage

With the timeline for the interest-only period lasting between 3 and 10 years, you will begin paying the interest and a monthly payment towards the principal when it ends. The principal is the money you owed and now have to pay back. Your payments towards your mortgage will be significantly higher during this period. However, when you enter your interest-only mortgage you should have been made aware of this by your lender.

End of your mortgage

The end of your mortgage is different from the end of your interest-only mortgage term. Therefore you should not be scared about paying the whole principal as you will have many years left before the whole balance should be paid off.

Reaching the end of term on your interest-only mortgage

By this point, if you are not ready to pay the rest of the mortgage term, you need to get in contact with your lender. It is possible to get an extension but you are not always guaranteed to get one from your lender. Lenders are advised to help you consider your options. If your lender decides to offer to extend the interest-only term it is generally advisable to accept the extension. However, before accepting their offer you may wish to speak to an independent financial advisor. The offer could have other financial implications that an expert will see clearer.

Using equity release 

If you are over 55 years old, getting your lender to extend your terms can be difficult but an equity release is an option. This type of mortgage stays with you until you pass or go into care. You can release equity by entering a lifetime mortgage. 

A lifetime mortgage negates having to make monthly payments. Instead, a lifetime mortgage interest is rolled up on top of your original loan and is settled when you die. The money is taken back when your property is sold in the event of your death. This means if you leave your property in your will, the property is sold and the remaining money that is left from repaying your mortgage goes to your beneficiaries.

Need help because your interest mortgage is ending?

If your interest-only mortgage is ending or coming to an end there are paths you can take. At HMS we deal with expired mortgages and frequently stop people from having their homes repossessed. If you need help you can fill out our form for expiring mortgages or call us on 0800 298 0571.