If you cannot pay your interest-only mortgage, you face a significant risk of repossession or foreclosure, as you still owe the full principal amount at the end of the term. You should immediately contact your lender to discuss options like refinancing, extending the term, or selling the property.
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. You might be either unable or unsure of how to change your plans at the moment.
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.
Yes, you could switch some or all of your interest only mortgage to a repayment mortgage (also known as a capital repayment mortgage) if this is suitable for you and you meet our criteria. We will not charge you a fee to do this, although you will see an increase in your monthly mortgage payments.
As a rule, the earlier you ask “can I extend my interest-only mortgage term”, the more they'll be able to do for you. There are several different ways they could extend your mortgage, including: turning all or part of it into a repayment mortgage, with a later agreed full repayment date.
If you'd like to reduce your balance before your mortgage term comes to an end, you could make regular or lump sum overpayments. And if your initial period has ended (which could have been a fixed or tracker rate), you can overpay without paying an Early Repayment Charge.
With an interest-only home loan, you can keep the original debt separate. You can then put savings into an offset account against any debt that's not tax deductible. This means you can move your savings to whichever debt is not tax deductible, which helps separate your debt.
👎 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!
You can repay an interest-only mortgage with an equity release plan. Moreover, it is a requirement to repay any outstanding mortgages as part of any equity release. Lifetime mortgages (the most popular form of equity release) allow you to make optional repayments of interest charges.
Repayment plans
If you can't pay your mortgage, immediately contact your lender and a HUD-approved housing counselor to explore options like forbearance (pausing payments), a repayment plan, or loan modification, as waiting reduces your choices; other solutions include short selling or deed-in-lieu of foreclosure, but always watch for scams by avoiding upfront fees and promises of guaranteed fixes.
Typically, foreclosure proceedings begin after you miss four consecutive mortgage payments — or are 120 days delinquent — without working out a solution with your lender, but the timing varies by your municipality, the housing market and your lender.
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.
If you are having trouble making repayments, you can apply for a hardship variation with your lender. If you stop making repayments on the home loan, the lender can take legal action against you to repossess (take) your home to repay the loan.
An interest-only mortgage payment on $200,000 depends on the interest rate, but at 5%, it's around $833/month (just interest), significantly lower than principal & interest payments, though you never build equity and pay more total interest over time, with later payments including principal. For example, at 3.25%, the initial payment is about $542/month for the interest-only period.
If you know you'll come into enough money to cover the full cost of a home, a repayment mortgage may not suit you. But if you won't receive the money for a number of years, an interest-only mortgage can help you buy property now, and still pay off the purchase price in one go once the mortgage term ends.
Once the interest-only period ends, you may have several options:
A $400,000 mortgage at 7% interest results in a principal & interest payment of about $2,661 per month for a 30-year loan or around $3,595 per month for a 15-year loan, not including taxes, insurance, or PMI. Your total monthly cost will be higher once those escrow items (property taxes, homeowners insurance, etc.) are added.
The average age to pay off a mortgage in the U.S. is around 62, with many becoming mortgage-free in their early 60s, coinciding with or just after typical retirement age, though figures vary by source. While some financial experts suggest paying it off by 45 for aggressive investing, data shows a significant portion of homeowners, especially older ones (60+), are mortgage-free, but increasingly, older adults (60s, 70s, 80s) carry more mortgage debt than previous generations, according to Marketplace.
Quite simply, a mortgage repayment plan is a way to pay back all of the money you've borrowed when your interest only mortgage comes to an end. It could be savings, endowment or pension policy or the proceeds from a property sale.
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.