The best way to pay off an interest-only mortgage is to actively reduce the principal balance through voluntary overpayments, switching to a capital repayment structure, or using a dedicated investment vehicle. Key strategies include making lump-sum payments with financial windfalls (bonuses, inheritances), increasing monthly payments, or refinancing to a shorter-term, principal-and-interest loan.
With interest-only mortgages, you only pay off the interest on the amount you borrow. You use savings, investments or other assets you have (known as 'repayment plans') to pay off the total amount borrowed at the end of your mortgage term.
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.
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.
The 3-7-3 Rule in mortgages isn't a loan type but a federal timeline from the TILA-RESPA Integrated Disclosure (TRID) rule, ensuring borrower protection by mandating disclosures within 3 business days of application, a 7-business-day wait between the initial Loan Estimate and closing, and another 3-day wait if significant changes (like APR) occur, giving borrowers time to review costs before committing to a loan.
“Paying off your mortgage early seems impossible but it is completely doable and people do it all the time, but how can you do it and why would you want to put in the extra effort? Paying off your mortgage early will rev up your wealth building.”
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.
If you do not feel downsizing is practical for health or other reasons, Martin Lewis thinks a lifetime mortgage is an option to consider, if you seek expert advice on all your options, including any other alternatives, such as entitlement to means tested benefits and taking a lodger to provide extra income, for example ...
If your mortgage term ends before your mortgage is paid. Speak to your lender right away if you cannot repay the capital sum that you owe. You can ask them to work with you on a repayment plan. Your lender cannot ask for the money back until your mortgage term ends.
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.
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.
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.
Overpayments directly reduce the outstanding loan balance, making the final repayment amount smaller or potentially allowing you to pay it off entirely before the term ends. When making overpayments, please be aware that you may have to pay an early repayment charge to your lender (if applicable).
The main cons of paying off a mortgage early include losing the mortgage interest tax deduction, facing opportunity costs (missing higher investment returns), and reducing your financial liquidity (tying up cash in your home instead of having it accessible). You might also incur prepayment penalties (though rare on conventional loans), and it can slightly lower your credit score by removing a large, established debt, according to U.S. Bank.
The biggest drawback of an interest only mortgage is that you don't pay off the loan as you go. This means you have to find another way to do this – you can't just forget about it. Another downside of an interest-only mortgage is that the total amount you repay over time will be much higher than a repayment mortgage.
Suze Orman strongly advocates paying off your mortgage by retirement for financial freedom and peace of mind, but her advice on how varies by situation, often prioritizing a solid emergency fund and retirement savings first, especially if interest rates are low. While she pushes for paying down debt aggressively (even reducing retirement savings beyond the 401(k) match), she cautions against draining savings for low-interest mortgages if it leaves you vulnerable to job loss or emergencies, suggesting you should have a strong safety net before using savings to pay it off.
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Disadvantages of Paying Off Your Mortgage Early
For example, if you can earn 6% to 8% annually in the stock market while your mortgage rate is 3%, the math suggests you might be better off investing. Liquidity Concerns: Once you pay off your mortgage, that money is tied up in your home and no longer easily accessible.