Once the interest-only payments end, you will have higher payments for the interest plus principal. You can also refinance the loan or pay it off in full. However, since home prices fluctuate there is a risk that you might owe more on your loan than your house is worth.
Can I refinance an Interest-Only mortgage loan? Yes, you can typically refinance an Interest-Only mortgage loan. Borrowers often choose to refinance into a traditional principal and interest loan, especially as their financial situation changes or interest rates become more favorable.
Where you want to remortgage to another lender, your new lender is likely to want to make sure that you can afford the loan and to put your repayment plan under scrutiny. This means that people with interest-only mortgages might find it difficult to get another mortgage.
You could change to a mortgage where you repay the capital as well as the interest. This is called a repayment mortgage. Your monthly payments are more but you can start paying back the capital you owe. If you cannot afford to switch your whole mortgage, you could keep some of it interest only to afford the payments.
A common rule of thumb is the “2% rule,” which suggests refinancing only when your new rate is at least two percentage points lower than your current one. This guideline can be helpful, especially if you plan to stay in your home for several more years, but it's not a hard requirement.
Remember, refinancing a mortgage may cost about 2% to 3% of the total loan amount. The average closing cost is around $5,000, but it ultimately depends on your loan amount, according to Freddie Mac. If, for instance, your loan is for $400,000, and the cost to refinance is 2% of that amount – you'd be paying $8,000.
Will Mortgage Rates Ever Go Down to 3% Again? While it's possible that interest rates could return to 3% territory in the future, it's highly unlikely that it'll happen anytime soon. In fact, some experts say it won't happen again without another major economic shock like the one caused by the COVID-19 pandemic.
Switch to a repayment mortgage
If you have sufficient time before your interest-only mortgage ends, ask your lender to switch it to a repayment mortgage. This will increase your monthly payments but endure that the balance is repaid at the end of the term.
If you have an interest only mortgage – or part of it is interest only – you can change to a capital repayment mortgage. That means you'll start to pay off the capital you've borrowed as well as the interest. If you move your whole mortgage to capital repayment you will have paid it off in full by the end of the term.
👎 Drawbacks of Interest-Only Mortgages
With interest-only, you're only paying to borrow, not own. So, unless the market adds value to your home, you won't be building any equity. If prices drop, you could even end up owing more than your home's worth – a bit like paying rent but with a big bill waiting at the end!
The interest paid on a mortgage, along with any points paid at closing, are tax-deductible if you itemize on your tax return. Use this calculator to see how this deduction can create a significant tax savings.
Switching to biweekly payments is one of the easiest and most effective ways to pay off your home loan faster. When you pay half your mortgage payment every two weeks results in 26 half-payments, which equals 13 full payments each year instead of 12.
Not preparing your paperwork in advance of applying
If your lender is very busy, they may take several weeks to process your application. Having all your paperwork ready in advance can speed up the remortgaging process. You can usually check on your new lender's website exactly what they will want to see.
To comfortably afford a 400k mortgage, you'll likely need an annual income between $100,000 to $125,000, depending on your specific financial situation and the terms of your mortgage.
What is the 3-7-3 Rule? Within 3 business days of your completed loan application, your lender must provide initial disclosures. This includes the Loan Estimate (LE), which outlines your estimated loan terms, interest rate, closing costs, and monthly payment breakdown.
Monthly payments on a $400,000 mortgage
At a 7.00% fixed interest rate, your monthly mortgage payment on a 30-year mortgage might total $2,661 a month, while a 15-year might cost $3,595 a month.
The 2% rule for a mortgage payoff involves refinancing your mortgage. Refinancing is when you take out a new loan to pay off your existing loan—ideally at a lower interest rate. The 2% rule states that you should aim for a new refinanced rate that is 2% lower than your current rate on the existing mortgage.
The option of making interest-only mortgage payments will generally last between three and 10 years. After the interest-only payment period ends, you will then have to make principal and interest payments, which means your monthly payment will increase, regardless of whether the interest rate stays the same or changes.
The remaining balance of your interest only mortgage will need to be repaid in full at the end of your term. This is the capital you borrowed to buy your home at the beginning of the contract. The repayment is usually made as a lump sum, as agreed when you took out the mortgage.
Historically, mortgage rates have spent much more time above 5% than below it. That doesn't mean rates can't decrease further, but it does suggest that a sustained return to 3% would likely require another major economic disruption.
What are the benefits of interest-only mortgages? Some people like the flexibility to be able to make lower payments initially, and pay more when their income or savings increase near the end of their mortgage term.
Overpayments on interest only parts of your mortgage won't automatically reduce your monthly mortgage payment, unless you ask us to, but could save you money by reducing the amount of interest charged.
Mortgage Rates Are Stabilizing
After a few years of rate volatility, mortgage rates have mostly leveled out, hovering in the mid-6% range through most of 2025. While buyers hope rates will drop further, most experts predict only slight changes in early 2026—meaning waiting may not result in significant savings.
Expect to pay about $1,798 to $2,201 per month for a $300,000 mortgage with a 30-year loan term, depending on your interest rate and other factors. Learn more about the upfront and long-term costs of a home loan.