Keeping Your Home: What to Do at the End of an Interest-Only Mortgage

When you take out a mortgage, there are mainly two types: repayment and interest-only. The key difference lies in how you pay back the loan. With a repayment mortgage, your monthly payments chip away at both the interest and the principal amount. By the end of the mortgage term, if you’ve made all your payments, your mortgage is fully repaid.

Interest-only mortgages are a bit different. Here, your monthly payments only cover the interest on the loan, meaning the principal amount remains untouched. At the end of the term, you must repay the full amount borrowed, usually through savings, investments, or selling the property.

The Challenge: When an Interest-Only Mortgage Ends

In today’s Daily Mail, their finance expert advises a reader on their options when the mortgage finishes. They’re facing a common challenge with interest-only mortgages. With a mortgage term nearing its end and a balance of £79,000 due, without sufficient funds to cover it, it’s crucial for them to explore the options.

Immediate Steps: Contacting Your Lender

The first step is to contact your lender as soon as possible. Discussing your situation with them can open up possibilities such as extending your mortgage term. This extension might provide you with more time to arrange for repayment, although it will increase the total interest you’ll pay over time.

Considering a Switch to a Repayment Mortgage

Switching to a repayment mortgage could be a solution. This would mean your future monthly payments would start reducing the principal amount. However, this switch often leads to higher monthly payments and depends on factors like your age and financial situation.

Exploring Other Options

  1. Retirement Interest-Only Mortgage: If you’re an older borrower, this might be a viable option. These mortgages don’t have a set term and are repaid when you sell the property, pass away, or move into long-term care. You’ll still pay interest monthly, but the repayment of the principal is deferred.
  2. Downsizing: Although not your preferred choice, selling your current home to downsize could be a practical way to clear your mortgage and potentially invest the surplus in a new property or savings.

Key Takeaways

  • Act Immediately: Time is of the essence. Reach out to your lender to understand your options.
  • Consider Switching to Repayment: If feasible, switching to a repayment mortgage can start reducing your principal debt.
  • Look into Specialized Mortgages: Especially for older borrowers, retirement interest-only mortgages can offer a flexible solution.
  • Think Long-Term: Sometimes, selling and downsizing can be a smart move, offering financial relief and a fresh start.

Final Thoughts

Facing the end of an interest-only mortgage without a repayment plan can be daunting, but by understanding your options and taking prompt action, you can find a way forward that secures your home and financial future.