Ways of repaying an interest-only mortgage
With an interest-only mortgage your repayments will only cover the interest due on the amount you borrowed. Therefore, you must have a repayment vehicle in place, or a strategy, that will pay off the money you originally borrowed at the end of the mortgage term. Find out more below – including what to do if you’re worried you won’t have enough to repay an existing interest-only mortgage.
Interest-only mortgages – an example
If you have a £100,000 interest-only mortgage for 25 years, at the end of 25 years of interest-only payments you will need to have £100,000 to pay off the capital.
Types of repayment vehicle for an interest-only mortgage
A repayment vehicle is a savings or investment plan set up to repay the mortgage capital at the end of the term.
Examples of repayment vehicles include:
- cash saved in a savings account or ISA (although some lenders are no longer accepting this as a repayment vehicle)
- stocks and shares ISAs
- investment bonds
- unit trusts
- regular savings plans (endowment policies), and
- other properties
You can find out more about how these work on our saving and investing pages.
Unless you understand how an investment works, it’s best to speak to a financial adviser.
How much do you need to save to pay the capital off?
To get a rough idea of the monthly amount you’ll need to put away in order to clear your mortgage at the end of the term use our simple savings calculator below.
Input the mortgage amount then see how much you’d need to invest each month over the period of the mortgage based on different estimated growth rates. Follow the key steps below if you’re unsure how to do this.
How to use the savings calculator to estimate costs
1. On the savings goal screen, input the mortgage amount you would need to pay off – eg £100,000.
2. Input the length of the mortgage term to indicate how long you need to save or invest for.
3. Now pick an interest rate that reflects the average return you’d aim for over the mortgage period. Based on current investment markets 3% – 5% could be realistic for lower and upper return rates after charges.
4. Click on calculate to estimate how much you’d need to put away each month to reach your goal based on the investment return you selected.
5. Try adjusting the figures to see how much more or less you’d need to save based on different rates of return.
Important: The value of investments can rise and fall and it’s possible that you could lose all of your money before you’re able to pay off your mortgage. It’s important to review your investments regularly. Ideally you’d want to be able to switch into much safer cash-based products as the term of your mortgage gets closer – that way you’ll have the peace of mind that you’ve got enough to cover your mortgage. Speak to a financial adviser about the best investment plan for you.
New stricter criteria for interest-only mortgages
You may have been asking yourself if you can get an interest-only mortgage. Interest-only can be a much riskier way to repay your mortgage. For example, during years of falling house prices there is a chance that you may end up with a property that’s worth less than your mortgage. In addition, if you’re paying into a savings or investment plan it may not grow as quickly or as much as you expected – leaving you with a shortfall.
As a result of these risks, some lenders have strict lending criteria – for example some are asking for a 50% deposit (or 50% equity if remortgaging) and others require minimum income levels. In addition, you must be able to show how you will pay off the mortgage at the end of the term. For this reason interest-only mortgages may not be suitable for some people.
Already have an interest-only mortgage? Why it’s important to review it now
Don’t do nothing!
If you have an interest-only mortgage review your repayment vehicle regularly to make sure it’s on track. If you don’t have one in place, act now.
If you currently have an interest-only mortgage it is essential that you review your repayment plan as soon as possible – or put one in place if you don’t have one.
If you have more than 50% equity in your property and a repayment vehicle that is on track and accepted by a wide range of lenders, then you should be okay. But if you don’t, you may find it difficult to remortgage when your existing deal comes to an end.
Make sure you review your investment plan regularly and take action or get financial advice if you think it won’t provide sufficient funds to pay off your mortgage.
Your options if you won’t have enough to repay your capital
Act now – the sooner you do, the sooner you can be confident that your mortgage will be repaid at the end of the term. Your options include:
- switching to a repayment mortgage with your current lender (this will mean an increase in your monthly payments)
- paying into an investment or saving plan, and
- using spare cash to reduce the mortgage
Talk to your mortgage lender
If you’re in any doubt about paying off an interest-only mortgage, speak to your lender or a mortgage adviser about your options. Use the links below or search online.
If you have an endowment
If you took out an endowment to pay off your capital and it looks like it won't pay out enough to repay the mortgage at the end of the term, there are things you can do now.