What if I can’t pay off my interest-only mortgage?

Your options for paying off an interest only mortgage

Written in line with our editorial policy.

If you are at or near the end of your interest-only mortgage term, are you worried about how you’ll repay the loan capital? Thankfully, there are a number of possible solutions.

If you find yourself unable to repay your interest-only mortgage, you may be feeling a mix of anxiety and uncertainty about what lies ahead. Fortunately, there are several strategies and options available that can help you manage the situation.

This article will guide you through various options for settling your interest-only mortgage. We hope it helps you find a solution that fits your circumstances. 

Please note that this article can’t advise you on your best option. Talk to your lender, a professional financial adviser or a debt counsellor for further help.

On this page:

• What is an interest-only mortgage?
• How popular are interest-only mortgages?
• Why might some people struggle to pay off an interest-only mortgage?
• What if I can’t pay off my interest-only mortgage – help from lenders
• How else can I pay off my interest-only mortgage?

What is an interest-only mortgage?

This style of mortgage allows borrowers to pay off just the interest each month, with the loan capital paid back at the end of the term. It’s in contrast to a traditional repayment mortgage, where you repay some of the loan capital along with the interest each month.

The attraction of an interest-only mortgage is clear: borrowers typically face much smaller monthly repayments compared to a repayment mortgage. 

However, in addition to the mortgage, borrowers usually need to set up a way of eventually repaying the loan capital at the end of the term. The repayment vehicle might be some kind of savings or investment plan, such as an endowment, and this involves cost on top of the interest payment.

How popular are interest-only mortgages?

Hundreds of thousands of people took out interest-only mortgages in the 1980s and 1990s in particular. But although repayment mortgages are now more common, interest-only mortgages are still available.

For example, an interest-only mortgage is sometimes a solution for people struggling to meet their payments with a repayment mortgage. That could be when someone comes to the end of their fixed rate deal to find that higher interest rates will push up their monthly payments. For some people, this will be unaffordable and so switching to an interest-only mortgage may be a solution.

This is why the then-Chancellor Jeremy Hunt announced the Mortgage Charter in June 2023. In the charter, some of the UK’s top mortgage lenders agreed to measures to support existing mortgage customers. One of these was for customers to be able to switch to interest-only payments for six months.

A Mortgage Solutions poll found that 64% of financial advisers saw a rise in customers choosing interest-only mortgages in 2023. According to Anna Sagar of Mortgage Solutions, the cost-of-living crisis was a driver behind this trend. The attractiveness of interest only mortgages from buy-to-let landlords was another factor.

According to UK Finance, there were 664,000 ‘pure’ interest-only mortgages outstanding at the end of 2023. Another 200,000 ‘partial’ interest-only deals were outstanding.

Why might some people struggle to pay off an interest-only mortgage?

The boom in interest-only mortgages 30+ years ago led to difficulties for some borrowers. At that time, some borrowers unfortunately didn’t ensure they would have sufficient funds to pay off the capital at the end of the term.

Borrowers will have typically been advised on ways to ensure funds to pay off the capital would be there. Often this meant taking out an endowment plan alongside their mortgage, with a monthly premium.

People hoped that investment performance would lead to sufficient funds being available to repay the mortgage when the term ended. Unfortunately, it became clear that some endowment policies would not perform as well as people were led to believe. 

What if I can’t pay off my interest-only mortgage – help from lenders

Lenders should be in touch with customers a year or so before the mortgage ends to let them know how much capital will be due, and when. Even so, some people are unable to pay off some or all of the capital at the end of their mortgage term.

If you are coming to the end of your interest-only mortgage term and are worried that you won’t be able to pay off the capital, what can you do?

The first step is to look again at your repayment vehicle if you set one up when you took out the mortgage. If you don’t know whether it will give you sufficient funds to repay the mortgage, you can contact the provider or ask a financial adviser for help.

If you took out an endowment policy and feel that it didn’t make as much as you were told, you may have been ‘mis-sold’. You can complain to the company involved, and if you are unhappy with their response complain to the Financial Ombudsman Service. But complaints can take considerable time to resolve, and compensation may not be enough to pay off your mortgage.

Can I extend my interest-only mortgage term?

If you are still concerned and don’t have money from savings or investments, contact your mortgage lender and explain the situation to them. They may be able to offer a solution if you are struggling to repay the capital on your interest-only mortgage. 

For example, they may be willing to turn all or part of your interest-only mortgage into a repayment mortgage, with the final repayment date pushed back. Or, they might let you repay the capital with several payments over time on an agreed schedule, instead of through a single lump sum.

Another option might be to remortgage with another lender, if you find that your current lender is unable to help. 

How else can I pay off my interest-only mortgage?

If you don’t have enough money to clear your mortgage and your lender can’t help, what can you do?

Here are some potential solutions, which in some cases may even allow you to pay off your interest-only mortgage early:

Help from family or friends. One possible solution is for family or friends to help you clear the loan capital. This might be done on the understanding that you will eventually leave the house to them as an inheritance. This needs careful thought, however, as there is usually no guarantee of future property values or inheritance levels. For example, you may one day have to sell the house to fund care home fees. 

Use your pension. Another option might be to take some money from your pension. If you are over-55 (over 57 from April 2028) you may be able to access your pension pot. You might access some or all of it as a lump sum to pay off an interest-only mortgage. You might want to talk to a financial adviser before using money from pension savings to clear a mortgage as this affects your long-term pension income.

Sell your home and move. You might be able to sell your home and use some of the proceeds to clear the outstanding mortgage capital. This may not be possible in all circumstances, for example if you don’t have enough equity in your home to clear the mortgage and buy another property.

Equity release. If you do not want to move home, equity release is a way to access your property wealth without having to sell up. There are no monthly loan repayments as the money you borrow and any accrued interest is paid back via the sale of your home when you pass away or move into long-term care. If you are a UK homeowner aged 55 or above, depending on lending criteria, you may be eligible. Read more in our article: ‘Can you use equity release to pay off interest-only mortgages?’. 

A retirement interest-only mortgage (RIO). This is also a product for over-55s where the loan is repaid when the property is sold, either when the homeowner dies or moves into long-term care. However, you’ll need to make monthly interest payments so there is a risk of repossession should you miss any payments.

We should add that when you took out your interest-only mortgage your lender will have asked how you expected to clear the capital. But you don’t have to use that method. Typically, if you pay the capital back, the lender won’t hold you to your original intention.

Repaying your interest-only mortgage with equity release

As we have explained above, there are options when it comes to paying off your interest-only mortgage. If you would like to find out whether equity release is one such option, we can help.

Please call 0800 096 2215, or request a call back for a time that suits you, and we will arrange a call with one of our selected advisers. Alternatively, you can use our free equity release calculator to see how much you could unlock. 

All the advice, quotations and the latest equity release rates you receive will be given free of charge. You’ll only pay a fee for advice if you choose to go ahead with a plan, and you can typically pay this from the money you release from your home.

Sources:

Mortgage Charter, 2023: Mortgage Charter Policy Paper.  Gov.uk. Accessed 03/09/2924

64% of financial advisers saw a rise in customers choosing interest-only mortgages in 2023: Two thirds of advisers see rise in interest-only mortgages – poll results. Mortgage Solutions. Accessed 03/09/2924.

664,000 ‘pure’ interest-only mortgages and 200,000 ‘partial’ interest-only deals outstanding at the end of 2023: interest-only mortgages. UK FInance. Accessed 03/09/2924

About Richard Groom. A writer with 20+ years’ experience across several sectors including financial services, Richard has a passion for writing clear and simple content on even the most complex of subjects. In his spare time, Richard loves exploring the hills and mountains of the UK on long walks with his faithful cocker spaniel. Follow Richard on LinkedIn