Planning for the end of an interest-only mortgage

Many people took out an interest-only mortgage years ago, and for some of them the end of the term is now close.

Each month the payments cover the interest. The amount borrowed, called the capital, is due in one go at the end. These notes follow what the Financial Conduct Authority (FCA) and the Financial Ombudsman Service tell borrowers about getting ready for that day. The FCA says people who act early usually have more choices.

How the loan is repaid

With an interest-only mortgage, the borrower makes separate plans to repay the capital by the end of the term. People use money from different places, such as an endowment policy or savings. The whole of the capital is still due on the agreed end date.

The FCA says interest-only loans made up 9% of regulated mortgages in the UK at the end of 2022. More than half of them were taken out before the 2008 financial crisis. At that time lenders did not have to check that a borrower had a credible plan to repay.

Checking where you stand

The FCA suggests starting with your mortgage offer and your latest statement. Together they show how much you owe and when it is due.

Then look at whether your plans will give you the whole amount by that date. If you plan to sell and buy a smaller home, the FCA suggests checking the value of your home regularly.

Talking to your lender early

The FCA's advice to borrowers is to speak to their lender or a mortgage adviser as early as possible. People who act earlier usually have more choices. They may even pay less interest.

For an interest-only mortgage taken out on or after 26 April 2014, the lender must review it at least once during the term. The lender checks that the repayment plan is still in place, at a point when there is still time to put it right.

No one can make you repay an interest-only loan before the end of the term, unless you break the terms of the mortgage. Missing your monthly payments is one example.

Options a lender may talk through

The FCA describes several options a lender may discuss with a borrower who can afford higher monthly payments.

Changing to a repayment mortgage over the same term.
Making the term longer.
Paying off part of the capital and switching the rest to repayment.

A borrower who cannot pay more each month may still have options, such as a change to the interest rate. The FCA says people who leave it late may have fewer choices. They may have to sell their home or cash in investments.

Retirement interest-only mortgages

Some lenders offer a retirement interest-only mortgage to older borrowers above a set age. The borrower pays the interest each month. The lender cannot ask for the capital back until a set life event, unless the borrower breaks the terms.

That event is usually the borrower's death or a move into residential care. The home is then sold to repay the loan. A lender must tell the borrower that a lifetime mortgage may be available and may suit them better.

Free help, and complaints

Free, impartial help is available from MoneyHelper, Citizens Advice and StepChange. In Scotland, Money Advice Scotland can point you to local debt advice. If your home is at risk, legal aid may be available.

If you are unhappy with how your lender is treating you, complain to the lender first. If you are still unhappy with its final response, the Financial Ombudsman Service can look at the case. It checks that the lender has listened to reasonable requests, such as more time to pay or a switch to repayment.