With an interest-only mortgage, your monthly payments cover the interest but none of the loan. At the end of the term you still owe the full amount, and your lender expects you to repay it.
What your lender expects
Lenders ask for a credible repayment plan when you take out the loan and normally check on it during the term. If you can't repay everything at the end, lenders call the amount you're missing a shortfall, and you may need to sell the home to clear it.
Common ways to repay
- Savings or investments, such as ISAs, built up over the term. Investments can fall in value, so check every year or two that the plan is on track.
- Tax-free cash from a pension when you retire.
- Selling the home and moving somewhere cheaper.
- Switching some or all of the mortgage to repayment, so the loan shrinks every month.
How much overpaying helps
Each overpayment lowers your balance, and a lower balance means less interest. Take a £150,000 interest-only mortgage at 4.5% over 20 years, where the interest costs £562.50 a month:
- If you overpay £200 a month and let your payment fall as the interest falls, you'll owe £102,000 at the end.
- If you keep paying £762.50 a month, the interest you save goes on the balance too, and you'll owe £72,375.
- To clear the whole loan in 20 years, you need about £386.47 a month on top of the interest: £948.97 in total, the same as a repayment mortgage.
The calculator shows the first case.
Switch part of the loan to repayment
If full repayment costs more than you can afford, you can move part of the loan to repayment. If you split the same £150,000 into £75,000 on repayment and £75,000 on interest-only, you'll pay £755.74 a month and still owe £75,000 at the end.
Start early
The sooner you act, the more each overpayment saves and the more choices you keep. Lenders limit how old you can be when a mortgage ends, so switching to repayment or extending the term gets harder as you get older. If the end of your term is close and you don't yet have a plan, speak to your lender soon.
This guide gives general information, not personal financial advice. For help with your own situation, speak to a regulated mortgage adviser or MoneyHelper, the free government-backed guidance service. Our independent help page lists other free services.