160,000 interest-only mortgages will be ending in 2019-20. And many more families will have interest-only mortgages ending after 2020, with a big peak in numbers in 2027-8 and in 2032.
When an interest-only mortgage ends, you have to repay all the amount you borrowed. The money to repay it can come from three sources:
- savings or investments;
- by getting a new mortgage; or
- by selling your house.
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Find out your options now – even if you are worried about this
If you will have difficulty repaying it when it finishes, you need to review your options and make some decisions as soon as possible.
The longer you leave it, the fewer choices you will have. If you are one of these people without a plan, you are risking having to sell your house or have it repossessed if you can’t repay the mortgage when it ends.
The FCA, which regulates mortgage lenders, has a leaflet explaining why you should act now and talk to your lender – even if you feel nothing can be done to help you. This may feel scary but:
- a lender can’t “cancel” your mortgage before the end date if you say you don’t have a plan to repay it;
- a lender can’t make you move onto a repayment mortgage that you can’t afford.
What probably won’t work…
“I want to carry on with the monthly payments after the end, I can afford them”
Your mortgage contract says you have to repay the full amount at the end. In 2018 the FCA said:
So if you have an interest-only remortgage, you can’t rely on your lender coming up with any options for you at the end, let alone a nice one such as allowing you to carry on making your current monthly mortgage payments.
“I want to get another interest-only mortgage at the end”
A lot of people are hoping for this. But times have changed and it is now very difficult to get a normal interest-only mortgage. Your current lender is very unlikely to offer you this as an option, however much equity you have.
People coming to the end of an interest-only mortgage will probably be well over 50, and many of them will be over 65. If you will be retiring during the new mortgage that you want, it is unlikely you will meet the mortgage affordability criteria unless you have very good pension arrangements.
Many people switched to an interest-only mortgage because they had a lot of other credit card and loan debt. Unless you have cleared your other unsecured debts they will make it harder to get a new mortgage.
“Was my mortgage mis-sold?”
Citizens Advice say “Some of the people who came to [us] said they were not made aware that they would need to repay the capital at the end of their term.” It is possible that in future the regulator or Financial Ombudsman may decide that some of these cases were “mis-sold”.
But this isn’t likely to apply to the majority of cases. Although an interest-only mortgage with no repayment plan is often a long-term disaster, it could have been a sensible option when you took out the mortgage and so it wasn’t mis-sold.
So what can you do now?
Your options for repaying your mortgage at the end include:
- switching to a repayment mortgage with your current lender. This calculator shows how much your monthly payments would increase. If you change the number of years to go, you can see how the longer you leave this, the more the repayments increase.
- switching part of your mortgage to repayment and leaving part on interest-only. This could be a good option if you have other ways of repaying the remaining interest-only part – perhaps you will get a lump sum from your pension when you retire, or you may be planning to downsize, so by switching part to repayment now you know you will be left with enough equity to buy the smaller house with no mortgage.
- paying more into an investment or saving plan each month. This is a riskier approach than paying the extra amount off your mortgage as the value of your investments could fall.
- using savings to reduce the mortgage. If you could repay some of the mortgage now, you may be able to afford the higher monthly payments for a repayment mortgage.
Improve your finances
Making larger repayments now may seem impossible, so also look at ways improve your finances;
- is everyone in the house paying their fair share of the costs? If your partner just pays the electricity bill and does some of the shopping, that’s not a fair contribution. Adult children at home should be paying you some rent, even if they are on benefits or a low income.
- do you have a spare room that you could rent out? Up to £7,500 a year would be tax-free money that you could pay straight off your mortgage.
- look into whether you could reclaim any PPI and do this before August 2019. Some people paid this without even realising! Do this yourself using the free Resolver service which generates all the letters and submits them for you. Don’t use a Claims firm – they don’t get better or faster results and you need every penny you can get back here to pay a chunk off your mortgage.
- look seriously at other ways of cutting your costs or increasing your income.
- if your non-mortgage debts are a big problem, then you need to take some debt advice on your whole situation including your interest-only mortgage: go to your local Citizens Advice or phone StepChange.
Using your pension
If you are expecting to take a 25% tax free lump sum when you retire, using that to repay some or all of an outstanding mortgage is usually a good option.
There are options to take more than 25% of your pension when you are over 55. This may sound like a great solution to your interest-only problem, but taking a lot of money out of your pension could give you a large tax bill. It could also mean that you will be broke when you retire, being “house rich and income poor”. Read Should I use my pension to pay debts? for more about this.
Equity Release – “lifetime mortgages”
Another alternative is equity release. You repay your interest-only mortgage by getting a “lifetime mortgage”. Martin Lewis has a good guide to Equity Release.
It may sound like an easy answer, to your interest-only mortgage ending, but there are major drawbacks. these are not cheap mortgages. Equity release can allow you to stay in your house when you are retired but the costs can mount very steeply.
With a lifetime mortgage you usually don’t have to make any repayments while you’re alive, instead the interest ‘rolls up’ and is added to the amount you borrowed (unpaid interest is added to the loan). But sometimes you can choose to make repayments – perhaps until you retire completely? Doing this will reduce the rate at which your mortgage size increases.
Lifetime mortgages are becoming increasingly common: 83,000 people took an equity release mortgage in 2018. But they won’t be possible for everyone with an interest-only mortgage:
- you have to have a LOT of equity. If you have only 20 or 30%, it isn’t likely to work;
- the older you are the more equity you can release. Many firms quote 55 as the minimum age, but over 70 is more practical. This means both you and your partner, it is the age of the younger one that matters.
Sell the house
If there is a lot of equity in your house and it is larger than you need, or you could move to a cheaper area, you should also consider making this move now, rather than waiting until your mortgage ends.
By moving earlier you will reduce your outgoings on your current mortgage and probably also on other costs such as utilities and council tax. Also if you are going to move areas away from your current circle of friends, this is easier to do the younger you are.
Getting a plan
Often you may need to create a plan that fits your individual situation, taking into account your other commitments, when you are likely to stop work, what your pension arrangements are etc.
A few examples:
- Mr A could decide to convert half hus mortgage to repayment now, which he can afford, and plan to repay the other half from the tax-free lump sum from his pension which he can draw when the mortgage ends.
- Mr and Mrs B have an expensive car loan which has three more years to run. When that ends, they can start overpaying their mortgage by several hundred pounds a month. This will increase the equity in their property by enough that by 2028 when their mortgage ends they should be able to get a lifetime mortgage.
- Ms C wants to stay in her current house as it’s convenient for her work, but will move to a cheaper area when she retires. She will still need a mortgage at that point, but she can make this smaller by getting a lodger for the next few years until she retires and using the money to overpay her current mortgage.
You may not be able to come up with a plan that will completely solve your problem, but it will still usually be best to do what you can now. So if you can only afford to move part of your mortgage to repayment now, doing that means you will be in a better position later to tackle the remain interest-only part. With more equity in your property because you have been paying it off, more options such as equity release may become possible.
Once you have a plan, it’s a good idea to do an annual check that it is “on track”. If at any point you can overpay your mortgage, this may help later if mortgage rates increase.
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Sean says
To put things into perspective, I have been made redundant 3 times in the past 20 years, one of those was during the recession of 2008 and I had to take a job on half my previous salary. This took out all our savings which resulted in the IVA then just as we were getting things in order, another redundancy meant having to take on further unsecured debt… not a choice but a necessity.
Our daughter is at college and hoping to go on to Uni.
Sara (Debt Camel) says
Well when she is at uni, I think she will be able to cope with you having a lodger. It could make a real difference to chipping away at the mortgage.
James says
Part of my interest-only mortgage was due to be paid recently.
The house was prepared for sale and went with an agent recently, I contacted the bank and told them my plan was to sell the house, they told me to keep on paying my mortgage of £380 per month, the house should sell for £830k and the bank is owed £224k in total leaving me with enough to buy a smaller house with cash.
The reason I am saying all of this is to let people know no one needs to panic if they plan to sell a house to pay back their mortgage as the bank agreed to one year to sell and a further extension as long as I have tried to sell and have also been paying the mortgage every month.
As long as you are straight with the bank and let them know your plans then it should be OK.
anthony says
My IO finishes in 5 years owing £67,000. Equity now is £180,000 approx. I had a meltdown 10 years ago, took out loand and a secnd of £40,000 when the balance was £27,000 and spent it on nonsense in online auctions – art work manily which is worth not even a fifth of what I paid. My GP said my auction addiction was a form of gambling & part of my depression. I am 60, and have had an irrational fear of change – that was the reason for the meltdown – I was TUPED to another job. Sounds crazy, I know. Now I get periods of pnic, sometimes suicidal at the thought that in 5 years I will have to move, and unlikely to have my own place. Tiny pension plus state pension will be my income when I retire. Apology for the rambling, feeling it now, so had to let off some steam.
Sara (Debt Camel) says
Can I suggest you go to your local Citizens Advice and ask for some debt advice on your options. It’s better to do this now as you may have more options now than if you wait until the mortgage is about to end.
anthony grant says
Thank you, Sarah, for the reply, I will have to. i was thinking of asking my lender to extend the time period – until my death. At £380.00 per month it would be affordable even when I retire.
Idris says
I took a mortgage out back in the early 2000’s Via a broker and I am 69 and I have nearly 130,000 still to pay on the property that I took it out on and I’m literally going to retire in 8 -12 months time.
I have paid the actual mortgage off a long time ago , possible several years ago and all I’ve been paying is just interest since then.
I also wasn’t aware I was going to be taking a interest only mortgage. This is why am baffled at the sum that’s still there which is approximately 60% of my home value.
I only realized when I sat down in front of the tv one day and looked in to my mortgage statements.
Can you help me because something has gone very wrong.
Thank You.
Idris.
Weatherman says
Hi Idris
I’m a bit confused here as well! If this was an interest-only mortgage, then you *haven’t* paid the mortgage off – your payments go towards the interest until a certain number of years later, at which point you need to repay the outstanding balance.
I would start by contacting your mortgage provider to check what type of mortgage you have with them. If you won’t be able to repay the amount that’s due, the best thing to do is get some debt advice by contacting National Debtline: 0808 808 4000
You *might* also be able to make a complaint about the original sale of the mortgage, but there are time limits that apply to this. If the broker has gone out of business, you would need to apply to the Financial Services Compensation Scheme (FSCS), but if not, then the Financial Ombudsman Service (FOS) – the time limits are the same for both: https://www.financial-ombudsman.org.uk/faqs/all/time-limits-consumers-making-complaint-complaint-time
Idris says
Hi ,
Apologies for the delayed response. I have been very ill and much better now.
Any how the mortgage I have is interest only and I remember the broker persuading me to take out this this option at the time 16 years ago.
I don’t have any other investments or ISA’s in place.
What do you think I should do as the mortgage term is due to come to a end in 6 months ?
And another thing
There was three loans I’ve paid Two off
This is the only one that remains.
This interest only lump sum has remained for the past 10 years.
Sara (Debt Camel) says
So you do remember this mortgage was interest only? You should have had several letters over the years from your mortgage lender asking you what plans you had?
There may be a possible case for mis-selling given your age. You could talk to your local Citizens Advice to see if they could help you with this.
But you must not assume a complaint is likely to come to your rescue – you need a plan for what you will do when the mortgage ends.
What your options are depends on your situation:
– is anyone in your family able to help you? Are you living on your own?
– you could look at equity release/lifetime mortgages (see https://www.moneyadviceservice.org.uk/en/articles/lifetime-mortgage) or retirement mortgages (https://www.moneyadviceservice.org.uk/en/articles/retirement-interest-only-mortgages). I can’t say whether you would be offered either of these, but the equity you have, your age and health are important.
– you could consider selling and moving a smaller/cheaper place possibly in a different cheaper area. This may not be what you want to do but if equity release or remortgaging aren’t possible or you don’t like their implications, then selling the house is your fall back.
Yule says
Our interest only morgage is up in October and have not missed any payments and cant afford to pay it off tried to get a life time morgage but unsucseful my building society is not allowing us to increase the term we dont want to sell if Building Society try to repossess can I fight this decision
Weatherman says
Hi Yule
If you think the Building Society’s decision not to let you increase your term is unfair, you could complain to them, although there’s no guarantee at all you’ll be successful.
If you can’t repay (either with a lump sum or buy selling the house), then they have the right to repossess the property and get their loan back. You can try to challenge a repossession order in the courts, but from what you’ve said it’s unlikely you would succeed.
I would speak to National Debtline, who can go through your options in more detail: 0808 808 4000
Christine Yule says
Thank you for your repky
James says
Yule
Talk to your bank issuing the mortgage.
My mortgage term was up too.
I phoned my bank and they were not willing to extend the mortgage.
But they did treat me fairly, they gave me two months to decorate the house and put it on the market, then six months to sell and told me if it was not sold in that period then another six months would be automatically allowed.
They will also want to see the house is on the market eg Rightmove and with an agent for sale.
But it is best to speak to them as they should be fair with you.