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.
Your Interest Only maturity date is the scheduled last day of your Interest Only period. At the end of day on your scheduled maturity date, your repayments will switch to Principal and Interest for the remaining loan term. This also applies to Interest in Advance periods.
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.
At the end of the interest only period, borrowers will begin monthly principal and interest payments until the full balance of the loan is paid in full. The length of time you can make your payments interest only depends on your lender and loan terms, but typically ranges from five to 10 years.
When this interest-only period ends, your monthly payment amount will raise substantially with the inclusion of both principal and interest payments. Additionally, if the interest-only loan is also an ARM, the payment amount may also fluctuate due to the periodic interest rate changes.
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.
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 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.
The bank won't give you an interest only loan forever. Generally, the bank will approve an interest only mortgage for up to 5 years. So once you get to the end of your interest only period, you need to apply for another interest only period.
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.
Once the introductory period expires, you have to pay interest on any remaining debts at the standard APR on the card. And as standard credit card APRs are usually at least 20%, that could prove expensive – especially if you can't clear the debt quickly.
Call your lender and ask about overpayments or switching to part repayment and part interest only. Check whether you'll be charged any fees. If you're worried that you won't be able to repay the mortgage, contact your lender and explain the situation. If you can't work out a solution with your lender, get free advice.
Once a mortgage term has ended, any outstanding balance is due immediately. This can leave the homeowner with limited options: sell, remortgage, or face possession action in the courts.
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.
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.
If you want to make principal payments during the interest-only period, you can, but that's not a requirement of the loan. You'll usually see interest-only loans structured as 3/1, 5/1, 7/1, or 10/1 adjustable-rate mortgages (ARMs).
Interest only mortgages are available for home buyers, although they're not as common as repayment mortgages. To get one, you'll need a plan in place to repay what you owe when the mortgage ends. As with any other mortgage, whether you're approved is at the lender's discretion.
If you cannot pay off your mortgage when the term ends, then you can ask your lender to extend it. This will likely involve an affordability assessment but will give you several extra years to pay off the remaining amount. Remortgage. Look into finding a new deal with a different lender.
👎 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!
Yes, there may be options available for you to extend your current interest only mortgage past retirement. The good news is that if you have built up enough equity, we can probably help you stay in your home for as long as you wish.
Benefits of an interest-only mortgage
The most obvious benefit of an interest-only mortgage is that monthly payments are initially considerably lower than of typical loans. These loans allow the borrower to make larger purchases that they would otherwise only be able to afford a few years down.
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.
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.