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.
It is possible to ask lender to extend your term to give you longer to save for the lump sum. This could give you the chance to switch at least some or all of the loan to a repayment mortgage, as by extending the term, your monthly repayments will be lower and more affordable.
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.
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.
If you can't catch up on your past due payments or work out another solution, the servicer or lender can begin a legal action (foreclosure) that could end up with them selling your home. This process can also add hundreds or thousands of dollars in additional costs to your loan.
The problem
With interest-only mortgages, the borrower makes no capital repayments on the loan, just interest. They are expected to have an investment plan in place to pay off the debt but some of these plans have been underperforming, while some borrowers never even set them up.
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 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.
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.
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.
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.
Mortgage term extensions are always up to a lender's discretion, so your current provider may consider your application if you already have an interest-only mortgage. Some lenders may be happy to extend for the longest period possible, others may only extend for a shorter time, while others may refuse outright.
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.
Generally, the legal foreclosure process can't start until you are at least 120 days behind on your mortgage. After that, once your servicer begins the legal process, the amount of time you have until an actual foreclosure sale varies by state. If you are having trouble making your mortgage payments, act quickly.
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.
Advantages to Interest Only Loans
Tax Deductible – The interest you pay on a mortgage is a tax deduction which saves you money on your income taxes. Be sure to consult a licensed tax professional for any tax deductions you may be eligible for.
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.
As your term comes to an end, your current interest-only mortgage lender will write to you on a regular basis prompting the repayment of the capital. We recommend leaving approximately 6 to 12 months' time before your products ends to get a new product arranged.
Cons of Interest-Only Mortgages
Since there's no principal reduction until the amortization period begins, you end up paying more in interest over the life of the loan than you would with a conventional mortgage with the same repayment term.
An interest-only loan is a smart choice if you're confident that your income will increase in the coming years, but they still have some drawbacks. Fortunately, there are many loan options for you to consider. Curious as to how low your payment could be with an interest-only mortgage?
If there is a hardship, your servicer will explore mortgage assistance options with you. Options might include a repayment plan, loan modification, short sale or Deed-In-Lieu of foreclosure. If a mortgage assistance solution cannot be reached, and the account remains delinquent, your home may be foreclosed on.
Usually, foreclosure proceedings begin after 120 days (four consecutive missed mortgage payments) of delinquency on your mortgage, but this isn't always the case. The housing market in which you live, your municipality and your lender may all impact the foreclosure timeline.
A "foreclosure bailout loan" is a mortgage loan designed to stop a foreclosure. Usually, the foreclosure bailout loan will refinance the entire balance of the existing loan. But some lenders make loans in an amount that's just sufficient to reinstate the defaulted loan.