My Interest only Mortgage is ending soon – what are the options?
My interest-only mortgage term is ending. It is a question many people are asking themselves. Don’t worry, you are not alone.
In this article we’ll explore some of the options you might have if your interest-only mortgage term is due to end soon and you’re not in a position to pay it off.
Interest only mortgage term is ending
Depending on your age and your income you might be able to remortgage away to a new
lender on a traditional mortgage. You could either keep the mortgage on pure interest only, change to a repayment mortgage or switch to ‘part & part’ meaning some on interest only and some on repayment; for example 60% on repayment and the remaining 40% on interest only.
You should be aware that lenders’ criteria to stay on interest only or part & part will is likely to be stricter now compared to when you originally took out the mortgage.
Remortgage to a Retirement Interest Only (RIO) Mortgage
RIO mortgage products are a relatively recent innovation. They are available to borrowers over 50 want to continue with an interest only mortgage indefinitely. Unlike a regular mortgage there is no end date on a RIO mortgage – it just continues to run and you continue to pay the interest due.
There is no maximum age limit to apply or redeem the mortgage by. To be eligible for a retirement interest only mortgage you must be able to evidence that the payments will be affordable both now and in the future. An example of this is by providing a pension projection letter or your entitlement to a state pension.
If your mortgage is joint with someone else, you will usually have to prove that in the event of either of you dying, the survivor could afford to pay the mortgage or will be in a position to clear it, perhaps using Life Insurance proceeds.
Remortgage to an Equity Release / Lifetime Mortgage
If you are over the age of 55, plan to continue living in your property for the rest of your life and like the idea of not being obliged to make monthly payments then this could be an option.
With equity release the amount you can borrow based on your age, health, and property value,
With equity release you are not obliged to service the interest on a monthly basis and if you do not make any monthly payments the interest will be added to the mortgage each month and compounded – a bit like a savings account, but instead of your money growing, your debt grows.
The amount you owe back to the lender will be based on what you originally borrowed plus the accrued interest. It is payable if you sell the property, move in to long term care or pass away.
Equity Release mortgages (also known as Lifetime Mortgages) allow you to stay in your home forever and all providers guarantee that your next of kin will never inherit a negative equity situation, but equity release can reduce the value of your estate, so it’s crucial to take independent mortgage and legal advice.
For more information if equity release then check out our sister article – https://www.mortgage-medics.com/is-equity-release-a-good-idea/
Pay off your mortgage by other means:
- Inheritance: If you are imminently expecting some inheritance which would cover all or part of your interest only mortgage this could be an option.
- Draw down a pension: If you are fortunate to have a large enough pension you may be able to draw part of your pension to pay off your interest only mortgage. You should however seek independent advice from a pensions adviser/tax adviser to confirm what pension benefits you would loose and what tax you would have to pay.
- Savings/investments: If you have money in savings or investments you may be able to withdraw this to pay off your mortgage. Before withdrawing your money, you should confirm with your bank, building society or financial adviser if there is a penalty to withdraw your funds and it may be advantageous to wait until the investment maturity date.
Sell your property
If you’re unable to do one of the above options or you simply wish to sell your property to pay off the interest only mortgage then you might choose to sell your home. You should however consider what your future plans will be, for example if you are going into rented accommodation – how much will your rent be per month and how long will you be able to afford it?
If looking to downsize to a smaller property you should also consider what associated fees are involved, such as stamp duty, Estate agent fees to sell your property and solicitor fees to complete the legal work.
Ask your lender for more time
If none of the above work for you right now, you should talk to your lender and ask them for more time. They may be willing to offer an extension to your existing mortgage, to allow you to make a plan. Bear in mind however, that if you are unable to repay your mortgage at the end of the agreed term, the lender may take steps to repossess the property and ultimately you could lose your home.
So if your interest only mortgage term is ending we’d be delighted to help. Get in touch and we’ll talk you through your options, or sign up to our monthly newsletter, to keep your finger on the pulse.
William Sproule – 7th September 2023