Options if you have an interest-only mortgage

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:

1. savings or investments;
2. by getting a new mortgage; or
3. by selling your house.

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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