What happens at the end of an interest only mortgage?

What Happens at the End of an Interest Only Mortgage?

Interest-only mortgages have been a popular choice for many UK borrowers seeking lower monthly payments compared to traditional repayment mortgages. However, as the name suggests, these mortgages only require the borrower to pay the interest on the loan during the term. At the end of the mortgage term, the borrower must repay the full capital amount borrowed. This article will discuss what happens at the end of an interest-only mortgage in the UK and the options available to borrowers.

What is an interest only mortgage?

An interest-only mortgage is a type of home loan where the borrower only pays the interest on the mortgage for a specified period, usually 5 to 25 years. This results in lower monthly payments during the interest-only term, as the principal amount remains unchanged. However, once the interest-only period ends, the borrower must repay the principal or face the prospect of losing their home.

What happens when my interest only mortgage ends?

When the interest only term comes to an end, borrowers face several options for dealing with the outstanding principal. These include:

Repayment: At the end of the interest-only term, borrowers can choose to repay the outstanding principal in a lump sum. You can accomplish this by using your own money, investments, or other assets. However, this may not be a feasible option for everyone, particularly if the property’s value has decreased or the borrower’s financial circumstances have changed.

Remortgage: Another option is to remortgage the property, either with the current lender or a new one. Borrowers may choose to switch to a repayment mortgage, which combines both principal and interest payments, or continue with an interest-only mortgage. Keep in mind that remortgaging may require a new valuation of the property and may be subject to credit checks and affordability assessments.

Downsizing: For some homeowners, downsizing to a smaller, more affordable property may be an attractive option. This allows the borrower to sell their current property, repay the outstanding mortgage, and purchase a new home using the remaining equity. However, this may be challenging in a declining property market or if the borrower has limited equity.

Equity Release: Equity release schemes, such as lifetime mortgages or home reversion plans, allow homeowners aged 55 or over to unlock the equity in their property without having to move. These schemes typically involve borrowing against the property’s value, with the loan and interest repaid when the homeowner dies or moves into long-term care. While this can provide a solution for repaying the interest-only mortgage, it’s important to consider the long-term implications and seek professional advice before proceeding.

Extension of the interest only term: In some cases, the lender may agree to extend the interest-only term, giving the borrower more time to repay the principal. This option is typically subject to a thorough affordability assessment and may result in higher overall interest costs.

As the end of an interest only mortgage term approaches, borrowers must have a repayment strategy in place to avoid financial difficulties. Options include repaying the mortgage balance using savings, investments, pension lump sums, or property sales, as well as remortgaging or extending the mortgage term. Downsizing and equity release schemes may also be viable alternatives for some borrowers. It is crucial to seek professional advice and explore all available options well in advance of the mortgage term ending to ensure a smooth transition and avoid any potential risks.

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