At the end of an interest-only mortgage, borrowers must repay the entire loan amount. Options include paying a lump sum, selling the property, remortgaging, or arranging extended repayment with the lender. Planning is crucial to avoid financial challenges and potential property repossession.
Interest-only repayments
Once the agreed interest-only period ends, you'll start repaying your principal at the current interest rate at that time. As you're not making payments on the 'principal', this will remain the same, unless you choose to make additional repayments.
But extending the term with your current provider is by no means guaranteed. Interest-only mortgages are riskier than conventional ones, making applying for an extension more difficult at times. Extensions are always at the lender's discretion. The key is to look at your options as soon as possible.
Switch to a repayment 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 go up but you can start paying off the capital you owe.
Interest-Only Loan Overview
After the interest-only period, you have the option to refinance, pay a lump sum, or begin paying down the principal. However, it's important to note that your monthly payments will increase significantly once you start paying both the principal and the interest.
Interest-only mortgages can be risky and expensive and are unsuitable for most borrowers. However, some people manage to make money by choosing an interest-only deal because their repayment plan returns more than they need to pay off the original loan amount.
Yes; offset accounts can be linked to interest only loans. By keeping funds in an offset account, you can benefit from reduced interest expenses while enjoying lower monthly repayments during the interest only period.
Some cons with this type of loan include: You're not building equity in the home: Building equity is important if you want your home to increase in value. With an interest-only loan, you aren't building equity on your home until you begin making payments towards the principal.
A typical interest only mortgage lasts between five and 25 years. It's possible to remortgage to a new deal at any time, which is often a good idea if interest rates have changed. You can also remortgage at the end of the deal – but you will need to meet affordability criteria.
Interest-only repayments are available for a set period over the life of the loan. Up to 5 years on an Owner-occupied loan and 10 years on an Investment loan. Principal and interest repayments following an interest-only period will be higher than if you'd been paying both the principal and interest from the start.
Going interest-only likely wins if you need a significant amount of short-term help. That's because it generally reduces your monthly bills by a greater amount. HOWEVER, you pay for it in the long-run as it will likely add more to the total cost of your mortgage.
Here's what you have to keep in mind about interest-only mortgage loans. Once the interest-only period ends, your monthly payment goes up to account for the amount that you're now expected to pay toward the principal. Lenders want to make sure that buyers can handle the higher payment when the time comes.
Like other types of lifetime mortgage, an interest-only lifetime mortgage is a way to release equity from your home to spend as you wish. And you need to meet many of the same requirements, like being at least 55.
Arranging your mortgage on interest-only will not necessarily mean you will be able to borrow more. However, in certain circumstances this may be possible. To see what you may be able to borrow use our affordability calculator. Alternatively speak to one of our experienced advisors.
Fixed-rate interest-only mortgages are not as common. With a 30-year fixed-rate interest-only loan, you might pay interest only for 10 years, then pay interest plus principal for the remaining 20 years.
If you have an interest-only mortgage, you need to make plans to repay the capital (the amount you borrowed). If you don't, you will have a large amount to pay at the end of your mortgage term and may need to sell your home to repay it.
An interest-only mortgage is a home loan with a unique perk: For a few years, you can make very low payments that only cover interest. Following that period, you can either refinance, pay the remaining balance in a lump sum or begin making regular monthly payments.
A balloon mortgage is a home loan with an initial period of low or interest-only payments. The borrower pays off the balance in full at the end of the term. A balloon mortgage is usually short-term, often five to seven years.
Yes. Some mortgage lenders will consider a straightforward remortgage on the same interest-only terms. In many cases, your existing lender will be prepared to offer you a new deal. But it's important to check the rest of the market, too, as there may be a better deal available by switching lenders.
You pay nothing off the principal during the interest-only period, so the amount borrowed doesn't reduce. Your repayments will increase after the interest-only period, which may not be affordable. The value of an asset such as your house or property, less any money owing on it. .
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.
Advantages of an interest-only mortgage
Lower monthly payments, as you are only paying back the interest on your loan. Greater control over your investments, meaning you can decide how you save to repay the capital of your mortgage.
Technically you don't need to pay off an interest-only mortgage until the term comes to an end – for example, after 25 years. But, from a money-saving perspective, you should seriously consider paying off your interest-only mortgage (at least in part) well before the term ends.
Cons of interest-only loans
Higher interest rates: Interest-only loans typically come with higher interest rates compared to fully amortizing mortgages. Lenders consider these loans riskier due to the lack of principal reduction during the interest-only period.