Repaying your interest only mortgage
If you have an interest only (or part & part) mortgage, when your mortgage reaches the end of its term, you’ll need to repay the amount you owe to us as a lump sum. So you need to have a plan in place for how you’ll repay the amount you originally borrowed.
If you’re a homeowner, we won’t always be able to extend the term of your interest only mortgage, and we don’t allow term extensions if you’re a buy-to-let landlord. We also can’t offer new mortgage deals or further loans to any customers.
We may need to take action to repossess your home or property if you’re unable to pay the full amount at the end of your term – and if you sell your home or investment property, you could be taken to court to recover any shortfall if the sale price achieved does not cover the balance you owe.
There are various ways you can prepare to pay back the balance you owe or minimise any potential shortfall. If you don’t have a plan, it’s never too late to get started. The sooner you act, the more options you’re likely to have.
Here are some of the options you could consider as part of your plan:
Making a lump sum overpayment or regular monthly overpayments will reduce your mortgage balance and the amount of interest you pay over the term of your mortgage. There’s no limit to the amount or frequency of overpayments you can make, and there are no early repayment charges to pay either.
Remember – whilst overpayments will help to reduce the balance you owe, you’ll still be left with an amount to repay to us at the end of your mortgage term, so you’d still need to consider this within your plan.
Use savings or investments
You could use money in a savings or investment account (such as an endowment or pension) to repay the balance you owe at the end of the mortgage term.
Because the value of your investments could rise or fall over time, it’s important to review your position at least once a year. Otherwise, you could reach the end of your mortgage term and find yourself with less than you need to repay your outstanding balance.
Sell your property
If you plan to sell your property and use the proceeds to repay the amount you owe, you should think this through carefully and make sure the sums add up. Timing can also be crucial – so make sure you know when it’s right to sell.
You must consider the effect any drop in the value of your property might have on the sale price you can achieve. House prices won’t necessarily rise during the remainder of your mortgage term and you may need to sell during a dip in the market.
You also need to consider any selling fees (such as costs of estate agents and solicitor) which could reduce the funds you have available. If you sell for less than you expected, or have less funds available than you planned for, you could be left with a shortfall on the amount you owe.
It could also take longer to sell your property than you anticipated, so you need to keep an eye on the housing market in your area.
Switch your mortgage to repayment or part & part
You can opt to pay off your balance gradually each month, by switching to a repayment (capital and interest) mortgage.
Here, your monthly payments will increase because as well as covering the interest you’re charged, they’ll also gradually pay back the balance you owe. But provided you stay on track with your monthly payments, the amount you borrowed will be completely paid off by the end of your mortgage term.
If a switch to full repayment is unaffordable, you could consider switching part of your mortgage to capital and interest, whilst leaving the remainder as interest only. This is known as a part & part mortgage.
Here, the increase in your monthly payments will be less than if you made a full switch. However, because part of your mortgage will remain on interest only, there will still be an outstanding amount to be repaid in full at the end of your term, so you’d still need to consider this within your plan.
Move your mortgage to another lender
It may be possible for you to remortgage to another lender and find a more suitable mortgage that better meets your needs, perhaps with a lower interest rate or longer term.
If you own and live in your home, bear in mind that it can be very difficult to obtain another interest only mortgage – so you may have to consider a repayment (capital and interest) mortgage instead. Your potential new lender will also need to carry out an affordability assessment and credit search to ensure your new mortgage is affordable and suitable for you.
If you’re a landlord with an investment property, it’s important to remember that most lenders now apply strict criteria for new buy-to-let mortgages. You may need to provide a significant deposit, have a greater level of equity or provide a high level of rental cover relative to the amount you wish to borrow.
There’s a lot to consider, so in all cases, we recommend that you speak to a mortgage broker to discuss your specific circumstances. Please be aware that some brokers charge an advice fee for their services, so you may want to confirm this with them.
No plan to repay your Interest Only mortgage?
If you don’t currently have a plan for how you will repay your Interest Only mortgage, it’s never too late to get started. The sooner you act, the more options you’re likely to have.
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