An interest-only mortgage could help you manage your budget more effectively, but it can also present a challenge when your existing deal expires. You might be wondering what your options are and how they could affect your long-term finances.
While interest-only mortgages aren’t as common in the UK as repayment mortgages, there are situations when they’re useful. For instance, if you want to reduce your monthly outgoings.
According to a June 2024 report from UK Finance, there were 664,000 pure interest-only mortgages at the end of 2023, and an additional 200,000 partial interest-only mortgages. Of these, around 187,000 are set to mature by 2027. If you’re among these mortgage holders, it could be useful to start thinking about your next steps.
Here are four options that might be right for you if your interest-only mortgage ends soon.
1. Take out a new interest-only mortgage
If you’re happy with your current arrangement and it suits your needs, you could choose to take out a new interest-only mortgage.
There are two things to keep in mind if this is the option you choose.
First, if you eventually want to own your home outright, creating a long-term plan could be useful. There are plenty of ways to do this, you could use other assets to reduce the debt, or you might plan to downsize and use your equity to purchase a new property without the use of a mortgage.
Second, if you intend to remain on an interest-only mortgage, it could become more difficult to secure the loan you need in the future. While there are retirement interest-only mortgages available, you’ll need to demonstrate that you have the income to continue meeting repayments.
2. Switch to a repayment mortgage
A mortgage deal expiring is the perfect opportunity to assess if another option is right for you.
Switching to a repayment mortgage could mean your monthly outgoings rise significantly. However, over the long term, it could make financial sense. Assuming you keep up with the repayments, at the end of the mortgage term, the property would be yours.
Let’s say your outstanding interest-only mortgage balance is £250,000 and has an interest rate of 4.5%, you’d pay £937 a month. If you took that same debt and moved it to a repayment mortgage with a 25-year term, your monthly outgoing would rise to £1,389.
So, you’d pay more now, but after 25 years, you’d be mortgage-free. This could be particularly useful when you’re planning for retirement. Having one less outgoing could make your income easier to manage once you’ve given up work.
3. Use your assets to pay off the debt
Many people taking out an interest-only mortgage choose to build up other assets that they might use to pay off all or a portion of the mortgage debt.
So, if reducing the outstanding balance is a priority for you, reviewing your savings, investments, and more could be a useful place to start. You might want to assess using other assets as part of a wider financial plan. For example, could using money you’ve previously earmarked for retirement affect your financial security in the future?
4. Start making overpayments
You don’t have to wait for your current mortgage deal to expire to start reducing the debt. If you’re in a position to, making overpayments could reduce the value of the outstanding loan and, in turn, mean less interest is accrued.
This option could provide you with flexibility. As you’ll be in control of the overpayments, you can keep your financial commitments low while reducing the debt when you have extra money.
Just be sure to check your mortgage contract, there could be an early repayment charge you need to factor in.
Do you want to talk about your options with an interest-only mortgage?
If you’re not sure which option is right for you, or if there’s another route you’d like to discuss, we’re here for you. We can work with you to understand your mortgage needs and the next steps you might take. Please contact us to speak to one of our team.
Please note: This blog is for general information only and does not constitute financial advice, which should be based on your individual circumstances. The information is aimed at retail clients only.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
