What If I Can’t Pay Off My Interest-Only Mortgage?
Estimated reading time 7 minutes
Are you one of the 750,000 homeowners who has a wholly interest-only mortgage? Or perhaps you are one of the 245,000 mortgage holders with a partial interest only mortgage? We know almost 70% of landlords in England own a home with a mortgage which is a much higher percentage than among owner occupiers, perhaps you are one of them and can’t pay off your interest-only mortgage.
As a homeowner with an interest-only mortgage you will already be aware of how attractive interest-only monthly repayments look versus the repayment mortgage given its lower monthly payments. The interest only mortgage though brings about its own set of unique set of challenges especially when the interest-only period comes to an end. This is due to the fact that at the end of the term of the interest-only mortgage you will need to pay off the total sum of the money you borrowed when you first took the mortgage.
What is an interest-only mortgage?
An interest-only mortgage is a type of home loan where you only cover the interest charges on the borrowed amount (capital) throughout the predetermined mortgage term. During the mortgage’s duration, you exclusively address the interest costs, leaving the capital untouched. Consequently, the outstanding balance owed to the lender remains never goes down and at the end of the term of your mortgage you will need to repay the same sum you borrowed when you took out the mortgage in full. You can make a lump sum payment from your savings, investments and pension or you can re-finance your property alternatively you can sell your flat or sell a property portfolio.
While the lower initial monthly payments make homeownership more attainable it is important to remember a couple of things
- You are more exposed to house prices because the amount you owe never goes down. You could find yourself in a negative equity situation if your house price falls below the mortgage balance.
- The total interest you pay over the lifetime of the interest only mortgage will be greater than the interest you pay on a repayment mortgage because the capital balance is never reduced.
What happens at the end of an interest-only mortgage?
When your interest-only mortgage comes to an end your lender will expect you pay off the loan in full with a single lump sum. They will have been in touch with you a year before, six months before and finally just before the end of your mortgage to discuss your options with you. The earlier you notify your lender that you can’t pay off your interest-only mortgage the more they’ll be able to do for you.
1. Refinance – your lender may be able to switch all or some of your mortgage to a repayment mortgage with a later agreed full repayment day. They may let you repay it with several agreed payments rather than one lump sum. Alternatively, you may be able to switch to another lender. Find out more information on the different types of mortgages lenders offer in our mortgage guide.
2. Equity Release – If you’re over 55, you might be able to take out equity release to pay off your interest-only mortgage. It allows you to access to part of the equity held in their house whilst still living in it. One equity release choice is a lifetime mortgage. For more info check out our guide “Can I Sell My House if I Have Equity Release?”
3. Policies – If you don’t have savings but have an endowment, investments and or savings you could sell these to pay off your interest-only mortgage.
4. Pension – If you have a pension, you can use the lump sum from you policy to repay some or all of the money you owe. Remember this will impact your retirement income so you should see independent financial advice before doing this.
5. Sell your Home or second property – If you are worried about not being able to pay off their interest-only mortgage at the end of the term you can consider the option of sell your flat, sell your house, sell buy-to-let property.
Options to sell my house
Selling your home via a traditional estate agent could secure the highest price but it takes the longest time. The average time it takes for a property to be shown and sold by an estate agent is between 4 and 6 months. The downside of selling your house to an Estate agent are:
a) Until a contract is exchanged your sale can fall through for many reasons including, property chain breaks, mortgages not being approved, gazundering and the buyer can change their mind.
b) You will have to pay the estate agent a fee to sell your property.
c) You will have to pay legal fees.
An Auction house sells your property under auction conditions which means once the hammer goes down, you and the buyer will have entered a legally binding contract. The buyer has to pay a 10% deposit within 24hrs and the remaining amount will be paid on the date specified in the contract. Selling a house at auction takes approximately 4-6 weeks.The downside of selling your flat in Auction are:
a) You will have to pay the entry fee whether your property sells or not.
b) There is no guarantee that your property will sell.
c) You will not know what price you will get for your house for sale.
d) You will have legal fees to pay.
Cash house buyer
Selling your home to a cash house buyer is another option. Due to the speed in which a cash house buyer is able to purchase a property this can be a very attractive option for someone that wants to sell a house fast and pay off their interest-only mortgage as they buy any house in any condition. The downside of selling to a cash house buyer:
a) Cash house buyers will offer you less for your property.
b) Not all cash buyers are genuine cash buyers.
Can’t pay off my interest-only mortgage
If you worried that you can’t pay off your interest-only mortgage you will no doubt, be having a few sleepless nights. Do remember that you have options the first one being to speak to your lender as early as possible, there are solutions out there you just need to find the one that suits your personal situation the best.
If you are considering selling your property Gaffsy is a genuine cash house buyer that does not need to borrow funds, so your property will not be in a chain, which means we can guarantee you a quick house sale providing you with much-needed funds promptly and we even cover your legal fees all you need to do is follow these five easy steps.
1) Use our enquiry form to get a free cash offer.
2) Receive your cash offer and decide if you want to proceed
3) If you decide you want to proceed an in-person valuation will take place.
4) A final cash off is made and upon acceptance solicitors are instructed, we cover your legal fees.
5) You confirm a completion date and the sale completes and you receive your cash.
What are you waiting for contact Gaffsy today .