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How to pay back an interest-only mortgage

If you have an interest-only mortgage on your property, you could face problems if you don’t have a plan to pay back the original loan when it ends.

In the last few months, we’ve seen an increase in phone calls to our advice line from people worried about how they’re going to pay back the outstanding balance on their interest-only mortgage.

They’re much rarer now than they used to be.  Unlike repayment mortgages, interest-only mortgages let you pay back just the interest each month. So, if you borrowed £100,000 for 10 years, the full £100,000 will still be payable at the end of the 10 year term.

When new mortgage rules were introduced in April 2014, the market changed.  Many lenders stopped offering interest-only rates. Those that still do can require borrowers to have an income of at least £75,000 and a deposit of between 25%-50%.

 

Some people told us they have been struggling to remortgage to another interest-only mortgage, or even to a repayment mortgage.

Others who borrowed before the new rules required you to provide evidence of how you were going to repay it are now worried they may not have the cash.

Redundancy or ill-health has affected other borrowers, disrupting their plans for paying the mortgage off.

If you’re in a similar situation, what can you do?

Make sure you have a suitable repayment plan

What makes a suitable repayment plan changes from lender to lender. Some may allow you to sell a second home. Other lenders will accept regular savings deposits, money from a pension pot if you’re over 55, investment bonds, an investment portfolio or regular savings plans (endowment policies).

Keep a regular eye on your investments to make sure they’re performing as you hoped.

Talk to your lender as soon as possible

If you think you won’t have enough money to cover the outstanding loan, you need to discuss your situation. Your lender will be able to go through some of your options. It might let you extend the mortgage or switch to a repayment deal.

Consider switching from an interest-only to a capital and interest mortgage

You may be able to change to a repayment mortgage, but you’ll have to pass more rigorous affordability checks as you’re effectively re- mortgaging if you’re switching lenders. However, these rules may not apply if you are an existing borrower as long as you do not wish to borrow more money and have a good payment history. Unfortunately if you’re thinking of switching this could be difficult.

If you switch, your payments will start repaying some of the capital rather than paying the interest, which means they’ll be higher every month.

What do you think?

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  • MARTIN / 25 April 2015

    It's all very well giving all this sensible advice, But when it comes down to remortgaging, you have to have a DEPOSIT. NO DEPOSIT NO MORTGAGE.
    If you have Credit Cards with minimum payments being made and are being charged. excessive interest - Also more stringent affordability questions, answering 100 or so questions and then having to do it all again when your passed onto another department, then you might aswell forget about remortgaging. Unless someone knows different.

  • Tracey / 23 April 2015

    Hi I have an endowment mortgage which has 3 years left to run I plan to remortgage my house to a new lender on an interest and repayment basis I know the endowment policy will not cover the original loan took out and is almost worthless for this purpose can I continue to pay the monthly premiums for the policy until it expires and just use this as my personal savings plan rather than to pay off the mortgage loan for which it will fall too short
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    ADMIN: Hello Tracey. If you contact our advice line on 0300 500 5000, one of our advisers will be able to help.

  • S / 22 April 2015

    I think the goal post change every so often, and things get hard and more difficult year by year. Often the is no help and the government does make things easy by increasing taxes, etc.