An interest-only mortgage, is where you only pay interest on the amount borrowed over the agreed mortgage term. This means you will need to have a separate repayment strategy in place as at the end of the mortgage term you must fully repay the outstanding balance as a lump sum.
The monthly mortgage payments do not include any costs associated with your repayment strategy.| Interest Only | Repayment |
| You only pay the interest on the loan for a specified period of time. This means you the amount you borrowed won’t reduce. | Each monthly payment includes both interest and a portion of the amount borrowed, so your mortgage balance will gradually reduce. |
| You need to have a suitable repayment strategy in place to pay off the outstanding balance as a lump sum at the end of the term. | At the end of the mortgage term there is no lump sum due as the entire balance is paid gradually over time. |
| There is a risk your repayment strategy may underperform or a change in financial circumstances may mean that you don’t have enough money to cover the lump sum that is due. | The risk of a large outstanding debt at the end of the mortgage term is eliminated. |
If you have an interest only mortgage, it is your responsibility to ensure you have a suitable repayment strategy in place and we have listed some of the options below and things for you to consider.
If you already have a repayment strategy in place, it’s important to ensure it remains on track to cover the amount you originally borrowed and we recommend doing this on an annual basis.
We have a responsibility to contact you throughout the term of your mortgage, it is important you respond to us, especially if you have concerns or your repayment strategy isn’t performing.
We have listed our acceptable options below and things for you to consider:
| Repayment Plan | Considerations |
| Switch to a repayment Mortgage | Switching all or some of your mortgage to a repayment mortgage means you’ll start paying off the amount you borrowed, as well as the interest. If you switch your whole mortgage to repayment, we’ll set your monthly payment to repay everything you owe by the end of your mortgage term. If you switch part of your mortgage, you’ll reduce the amount you’ll need to repay by the end. We will carry out an affordability assessment to make sure it’s affordable for you |
Savings including ISA’s |
A change in financial circumstances may make it difficult to commit to saving in the long term or having to dip into these funds. If you end up short when the mortgage comes up for renewal this may lead to a last minute financial panic or the need to sell other assets or your home. If these savings are kept in low interest accounts, inflation could erode their value. Using your savings to repay your mortgage may leave you without a financial safety net for unexpected expenses in the future such as home repairs or job loss. |
| Sale of your main or second property | The property market can fluctuate meaning the value of your house may rise as well as fall. Selling a house may take some time, especially in a slow market, so give yourself enough time and consider some of the costs with selling, like estate agency fees legal fees, and any potential repairs needed. If you are considering using the sale of your main property to repay your mortgage, take into consideration that you may change your mind and wish to continuing living in the property at the end of the term. This would not be possible without having a suitable alternative strategy in place, in good time. |
| Pension | Using the lump-sum from your pension policy to repay some, or all, of your mortgage at the end of the term will impact the income you'll have when you retire. If you're unsure how this will affect your retirement income, you should speak to an independent financial adviser. |
| Endowment policy | This is an investment-based product, meaning its value depends on how well, the underlying investments such as stocks, bonds and shares perform. If the investment underperforms the final payout may be insufficient to repay the full mortgage balance. Its important to regularly review the performance and ensure you can access the money when you need it. |
| Investment | Performance of investments like stocks bonds and shares can be volatile and you are not guaranteed that the return on your investments will meet your expectations. The success of investments depends heavily on timing and when you may need to sell. Its important to regularly review the performance and be able to access the money when you need it. |
If you aren’t sure about your plans or have concerns, speaking to us will help as we can talk through the options that we have available and answer any questions that you may have regarding the mortgage.
If ‘Sale of your main property’ is your current repayment strategy and you have decided this is not right for you, please contact us as soon as possible so we can discuss your options.
The key thing is not to delay, act now and give us a call to discuss the options available to you such as converting to a repayment mortgage, making over payments or extending your mortgage term.
We have a responsibility to contact you throughout the term of your mortgage, it is important you respond to us, especially if you have concerns or your repayment strategy isn’t performing.
If you would like to see some examples of how converting to a repayment mortgage, making over payments or extending your term could benefit you please click here.
Still have a questions? Please get in touch and we will be more than happy to help.
Book an appointment with one of our friendly experts to chat through your options and get the ball rolling.