An interest only mortgage, as can be deduced from the name, is a mortgage wherein you pay only the interest per month, which will lower your monthly outgoings, though you will be left with a lump sum mortgage balance to pay back at the end of your term.
Once your term has ended, you will typically use a repayment vehicle to cover the remaining balance in one final payment.
Typically these days, new interest only mortgages are mostly commonly found in buy to let mortgages, as they can be great tools to help landlords in maximising their profits, though they’re not exclusive to the buy to let mortgage market.
If you are an older homeowner, however, you may actually have an interest only mortgage of your own that you could be due to pay back soon. Though less commonly encountered nowadays, residential interest only mortgages were very popular options for home buyers back in the 1980s & 1990s.
Anyone who had taken out an interest only mortgage during this particular point in time, will have likely been advised to set up an investment vehicle at that time, that would later be used to pay back the capital at the end of the term, once the investment had matured.
Unfortunately, this wasn’t always the outcome once the term ended and many of these policies were mis-sold, which would lead on to financial compensation for many homeowners who chose to complain about their experience with interest only mortgages.
Endowment mortgages are long since past their prime and they are no longer accessible as a mortgage option, though there is a chance that some homeowners out there may still have some of these to their name.
Perhaps they neglected to remortgage onto a repayment mortgage at some point in the past, with their endowment policy failing to pay out and the capital balance of their interest only mortgage still being left for them to pay off.
As you head towards the end of your term, generally you will have had some level of correspondence from your mortgage lender, as it is their job to remind you that you will need to pay back your remaining mortgage balance. Rarely would this be a genuine surprise to a homeowner, because of this.
If you had one of these previously, you will likely be an older homeowner now, nearing the end of your term and with your mortgage capital balance left to pay off.
Whether you have the entire amount to pay back or an endowment mortgage shortfall to pay back (this would happen if your endowment policy failed to pay your remaining balance and there was still an amount left to pay), releasing equity from your home via a lifetime mortgage, can be helpful.
Available to homeowners who are over the age of 55 and with a home that is valued at least £70,000, equity release and later life products, such as lifetime mortgages, give you the option of releasing a tax-free lump-sum from your home, to cover a large portion of what is owed, if not, the full amount.
Equity release isn’t right for everyone. Discussing your options with an experienced later life mortgage advisor is a great way to learn the pros and cons of equity release and lifetime mortgages, to see if it is a viable option for you to cover the costs of your interest only mortgage, post-endowment policy.
To understand the features and risks of equity release and lifetime mortgages, ask for a personalised illustration.
A lifetime mortgage may impact the value of your estate and it could affect your entitlement to current and future means tested benefits. The loan plus accrued interest will repayable upon death or moving into long term care.
Of course, not everyone with an interest only mortgage took out their mortgage with an endowment policy.
Up until the UK’s financial crisis back in 2007-8, interest only mortgages were still heavily suggested by banks and mortgage broker alike. Because of this, there will still be many homeowners out there who are no doubt not too far off needing to repay their remaining capital balance on their mortgage.
Whilst equity release and lifetime mortgages could still be valid options for older homeowners, there are still plenty of options out there for a younger homeowner as well, especially if they are heading towards the end of their interest only mortgage term.
Communication is always key to the mortgage process.
If there are going to be any periods where you are not sure if you are going to be able to pay your mortgage, you would always do well to let the mortgage lender know, as they will work with you to come up with a possible solution that leaves both parties happy. The same applies with interest only mortgages.
With any instances where you know that you won’t be able to pay back the mortgage capital balance at the end of the term, it would be best that you speak with your mortgage lender, to discuss whether or not they would allow you to remortgage with them and move onto a repayment mortgage.
On the other hand, you could always get in touch with an experienced mortgage broker like us, as we can give you the option to possibly take out a remortgage with a different lender. We have a variety of deals that could be on offer, thanks to our large panel of mortgage lenders.
If you are maybe ready to look at downsizing into a smaller, more comfortable home (this is commonplace for families who have perhaps seen their children move out, leaving only two adults in a larger home), this could be a great way to pay back your capital balance.
Not only would the sale of your property be enough to cover the remaining interest only mortgage capital balance, but there may also be enough left over from the sale, to put down as a deposit for your new, much smaller home.
Another useful way to pay back your interest only mortgage capital balance, is to use any savings you have been building up. Further to this, if you are due an inheritance from a family member at any point, this may be “fast-tracked”, allowing you to use this inheritance to cover your remaining balance.
This may occur through your parents doing their own equity release process, via taking out a lifetime mortgage, if they are over the age of 55 and their home is worth at least £70,000.
No matter whether you are an older homeowner looking to make use of equity release, or a younger homeowner looking at the other mortgage options that could be available to you, we would highly recommend that you speak with a trusted and specialist mortgage expert today.
Book your free remortgage review or later life mortgage appointment and we’ll look at the ways we are able to help you in paying back your interest only mortgage.
Last edited 08/02/2023
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UK Moneyman Limited is Registered in England, No. 6789312
Registered Address: 10 Consort Court, Hull, HU9 1PU.
Authorised and Regulated by the Financial Conduct Authority.
We are entered on the Financial Services Register No. 627742 at www.register.fca.org.uk
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UK Moneyman Limited is Registered in England, No. 6789312
Registered Address: 10 Consort Court, Hull, HU9 1PU.
Authorised and Regulated by the Financial Conduct Authority.
We are entered on the Financial Services Register No. 627742 at www.register.fca.org.uk
