Angel Thomas
Principal Adviser, In2Equity Ltd
If you took an interest-only mortgage in the 2000s or early 2010s, you are not alone - and you are not the only one wondering whether the repayment vehicle will actually cover the loan. Thousands of borrowers are now reaching the end of their 25-year term with a shortfall.
Here is what happens, what lenders do, and your realistic options if the numbers do not add up.
The repayment vehicle cliff
An interest-only mortgage means you pay only the interest each month. The capital - the amount you borrowed - stays the same and is due in full at the end of the term. The plan was always to have a separate investment (an endowment, ISA, or pension lump sum) to repay the capital.
For many borrowers, those investments have not performed as hoped. Endowments in particular famously underperformed, and the shortfall can be tens of thousands of pounds.
What lenders do at the end of the term
Lenders do not want to repossess. They will usually offer options: extend the term, switch you to capital and interest repayments, or in some cases allow a managed sale. But they will not simply write off the debt, and they will not let you stay on interest-only indefinitely.
The earlier you engage, the more options you have. Waiting until the final month leaves you with very little room to move.
Your options in the final five years
Switch to capital and interest: If you can afford it, converting to a repayment mortgage clears the capital over a new term. The monthly cost rises, but the debt is gone at the end.
Extend the term: Some lenders will extend the term, often to age 70 or 75, giving you more time to clear the capital. This depends on your age and income.
Downsize: Selling and buying a smaller property can clear the debt and leave you mortgage-free. We can model whether the numbers work for your area.
Retirement Interest-Only (RIO): If you are over 55, a RIO mortgage lets you stay on interest-only with no set repayment date - the capital is repaid from your estate when you die or move into care. See our Over 60s page for details.
The honest Take
Do not ignore the letter. The borrowers who get into trouble are the ones who put it off. If you are within 5 years of your interest-only term ending, book a review now. We will model your repayment vehicle, check your options, and tell you honestly whether you have a problem - and if you do, how to fix it.