In this brief guide, we are going to discuss the question “ what if I can’t pay off my interest-only mortgage “ and hopefully provide some suitable suggestions which you could use to ensure you are in the best financial position possible.
You should also consider seeking independent financial advice as failure to pay off your interest-only mortgage could result in you having your property repossessed.
What if I can’t pay off my interest-only mortgage?
If you can’t pay off your interest-only mortgage then there are a few things that will happen. Some of these actions are actions the mortgage lender may take and the rest are actions you can take.
Your mortgage lender may switch your mortgage
If you can’t pay off your interest-only mortgage then you may find that some mortgage lenders will discuss the matter with you and agree to switch your interest-only mortgage to a capital repayment mortgage or a part and part mortgage (a mortgage which is part interest-only and part capital repayment).
This could potentially mean that you are now much more likely to repay your mortgage balance in full. It’s a win for the mortgage lender and may be a win for you too.
Your mortgage lender will repossess your property
In some cases if you can’t pay off your interest-only mortgage then the mortgage lender will simply move to repossess the property. Mortgage lenders will usually look to repossess a property as a last resort but if they find that this is the best outcome from the situation then a home repossession will start.
Your mortgage lender may reduce your mortgage balance
If you can’t pay off your interest-only mortgage then there are some cases where your mortgage lender will offer to reduce the mortgage balance you are due to pay back at the end of your interest-only mortgage if you are unable to pay off your interest-only mortgage but this will usually only be at your request and usually when the mortgage lender may have mis sold your interest-only mortgage in the first instance.
You can switch to a part and part mortgage
If you can’t pay off your interest-only mortgage then you may be able to switch your mortgage to a part and part mortgage.
A part and part mortgage is a mortgage that is part interest-only and part capital repayment.
This means that part of your monthly mortgage repayments are going towards repaying the balance owed on the mortgage and reducing the balance owed.
The mortgage lender is under no obligation to agree to switching your mortgage to a part and part mortgage and will assess your mortgage affordability to determine if you can continue to make your monthly mortgage repayments and if you will be in a better position to pay off the outstanding mortgage balance on the interest-only portion of your mortgage.
If you are approaching the mortgage lenders maximum lending age then you may not be able to get a part and part mortgage from the same mortgage lender and may need to seek alternatives.
Remortgage to a capital repayment
If you can’t pay off your interest-only mortgage then You may also be able to get a remortgage to a capital remortgage. This will be even more likely if your property has risen in price and you now have much more equity in your property which you could remortgage and use to pay off your interest-only mortgage.
Even if you don’t have significant equity in your property you will still be able to access remortgage option but the mortgage rates on these may not be as competitive.
You could sell your property to repay the mortgage balance
If you are not in negative equity (hence your property is not worth less than the mortgage balance owed) then you could simply sell your property and use the money earned to pay off your interest-only mortgage.
If property prices have risen since you bought your property and you now have significant equity then this may even be an additional advantage as the mortgage balance owed on the property could now simply be a portion of the properties value.
Extend your interest-only mortgage term
If you can’t pay off your interest-only mortgage then you could potentially extend your interest-only mortgage term by a few years if you can prove to the mortgage lender that you will be in a much better position and able to pay off your interest-only mortgage by the time the new interest-only mortgage term ends.
If the mortgage lender refuses to extend your mortgage then you may have to look at other options.
Get an equity release plan
If you are over 55 then you may be able to get an equity release plan to pay off your interest-only mortgage.
An equity release plan is a type of mortgage which helps you to release the equity you have in your property. With an equity release plan you do not have to pay back the money borrowed until you die or move into a long term care home. The money borrowed is also repaid by selling your property.
Borrow from family
If you find that you can’t afford your interest-only mortgage then you may want to consider borrowing money from your family or friends as this may be a better alternative than having your home repossessed by the mortgage lender.
Go to the financial ombudsman
If you can’t pay off your interest-only mortgage and you felt you have been treated unfairly or even missold the interest-only mortgage then you should complain to the mortgage lender to see how they will resolve your complaint.
If they are unable to give you a suitable response then you can take your case to the financial ombudsman.
The financial ombudsman states that most complaints it receives around people not being able to repay their interest-only mortgages fall within the scope below:
“they were advised to take an interest-only mortgage and now can’t afford to repay the capital
their lender won’t help because it was the broker’s responsibility to advise them
they want to switch to a capital repayment plan – but the lender won’t let them
their mortgage term is ending and the lender won’t let them extend it
their mortgage term is ending and they can’t sell their property and are being threatened with repossession
they don’t want to apply for a term extension “
Before taking the caeto the financial ombudsman you should be sure you have a credible case if not this could be a waste of time and you could find yourself in the same situation if not a worse situation after so much time has passed.
You may have a credible claim if the mortgage lender or mortgage broker never carried out a mortgage affordability check to see if you could afford the mortgage or if the mortgage lender never checked to see if you had a suitable capital repayment vehicle or carried out any periodic checks to ensure your capital repayment vehicle was still viable.
If the financial ombudsman finds that you have a credible claim then they could ask the mortgage lender to do one of the following things:
“Refund the cost of setting up and closing down the mortgage – if they think you had the wrong mortgage.
Put you in the position you would’ve been in if you’d received proper advice.
Instruct the mortgage lender to work out a realistic repayment plan with you – if the mortgage was suitable, but you can’t repay the capital.
Ask the mortgage lender to pay compensation – if the mortgage lender has caused unnecessary distress to your “
FAQs about “ What if I can’t pay off my interest-only mortgage? “
Below are some of the frequently asked questions about the question “ What if I can’t pay off my interest-only mortgage? “.
What happens when my interest-only mortgage ends?
Once your interest-only mortgage ends the mortgage lender will request that you pay off the mortgage balance which is outstanding. You will have had to choose a capital repayment plan when you initially took out your interest-only mortgage.
Can I extend my interest-only mortgage term?
Some mortgage lenders may allow you to extend your interest-only mortgage but this will be based on your mortgage affordability and the mortgage rates may be much different than when you initially took out your interest-only mortgage.
This is because interest-only mortgages are no longer as common as they used to be in the past.
Some mortgage lenders will simply charge you an increased mortgage rate when the extended term kicks in. Increasing the mortgage term on your interest-only mortgage will not reduce your monthly mortgage repayments as the capital outstanding which interest is being charged will remain the same throughout the mortgage term.
How do I pay off my interest-only mortgage?
There are different ways to pay off your interest-only mortgage, some include:
Sell your property
Remortgage to a capital repayment mortgage
Use your savings and investments
Get an equity release plan if you are over 55 years old
Borrow money from your friends and family
Downsize your property
What happens if you can’t pay off your mortgage?
Generally, if you can’t pay off your mortgage your home will usually be repossessed by the mortgage lender. Your mortgage lender may also be able to repossess your other possessions if the property sale price does not cover the total cost of the mortgage.
You can avoid this by selling your home and using the funds to repay your mortgage or remortgage to a different mortgage lender if possible.
Can I change my interest-only mortgage to a repayment mortgage?
You may be able to switch to a repayment mortgage if you pass the mortgage lenders affordability.
Some mortgage lenders may also allow you to switch to a part and part mortgage where some of the mortgage is a repayment mortgage and the rest is an interest-only mortgage.
Speak to a mortgage broker
You may want to consider using an independent mortgage broker to get a mortgage if this is one of your options if you can’t pay off your interest-only mortgage.
Mortgage brokers are important as they can access mortgage products from across the whole of the market in some cases. This could be over 11,000 mortgage products. This may have some advantages than going directly to a mortgage lender.
A mortgage broker will look to understand your financial circumstances and then provide recommendations on which mortgage products may be suitable for you.
After giving you these mortgage recommendations, most mortgage brokers will seek your consent to apply for a mortgage in principle. This will allow you to shop for your home easier as more estate agents and sellers may take you seriously or it will give you confidence that your remortgage is indeed a possibility before you make a full mortgage application. Once you have found a home you want to buy or are satisfied with the mortgage offer for your remortgage then the mortgage broker will then look to get you a mortgage offer.
This will come with a key facts illustration document which details out the features of your mortgage including how much you will pay per month if there are any limits such as early repayment fees, or annual overpayment limits.
If you are happy with everything you can then go on to secure your mortgage with the help of a conveyancer. Your conveyancer will manage the legal searches on the property to ensure there aren’t any issues with it, they will oversee the sales agreement to ensure it is in your best interest, they will manage the transfer of mortgage funds, exchange contracts with the seller or their conveyancer and set a completion date with the seller or their conveyancer.
In this guide, we answered the question “What if I can’t pay off my interest-only mortgage? “. If you have any questions or comments please let us know.
If you need financial advice and you live in the UK then you could contact the Money Advice service over the phone or via chat for impartial advice.
You can also contact the debt charity “Step Change” if you are in debt and need help.