Interest-only mortgages

How does an interest-only mortgage work?

When you have an interest-only mortgage, your monthly payments only pay the interest charged on the amount you borrowed. This means the interest-only balance doesn’t reduce, and you’ll need to have separate plans to pay this amount by the time your mortgage ends.

For example, if you borrowed £125,000 with an interest rate of 3% over 25 years, we’ll set your monthly mortgage payments at £313. By the end of your mortgage, you will still need to repay the £125,000 you originally borrowed.

How does this differ from a repayment mortgage?

A capital-and-interest repayment mortgage (known as a repayment mortgage) will, if all payments are made as scheduled, be fully reduced to a £0 balance at the end of the mortgage term. This is because each monthly payment is made up of capital and interest – part of the payment will reduce the balance, while the interest part will pay off any interest accrued in the month.

Repayment mortgages are suitable for people who don’t have the means to pay off the lump-sum balance at the end of an interest-only mortgage, as they will have the reassurance that the balance will be cleared during the term. They are reducing their balance as well as paying interest, so monthly payments for a capital-repayment mortgage are higher than on an interest-only mortgage.

Can I change from interest-only to repayment?

We would need to have an appointment with you to ensure the changes you want to make are affordable. We would need to review your income and expenditure. We offer 2 levels of service:

Information only: You tell us what you want to do, and we’ll have a look to see if we can. We’ll give you facts and information, and an idea of the repayments if you need them, but we won’t advise what’s best in your circumstances. That’s because this service doesn’t give advice.

Mortgage advice: We’ll review your circumstances and recommend how to proceed. This could be a change to your repayment method, your term and/or your product based on the information we gather.

It’s your choice which path suits you better. Please call us on 01664 414145 to arrange an appointment with our team.

What repayment options do I have?

The enclosed declaration of intent has an inclusive list of our acceptable repayment plans. We are flexible, so if yours is a little different to those listed, please let us know. We may give you a call to chat about this further, but we can arrange this for a time that suits you.

I can repay the interest-only balance. Do I need to do anything more?

That’s great. If you’re confident your plans are on track to repay everything you owe, let us know. It only takes a couple of minutes to tell us your plans. You can let us know by completing the Declaration of Intent , by giving us a call on 01664 414145 or by emailing us at Retentions@mmbs.co.uk. Please note it is your responsibility to ensure you have the appropriate payment plans in place.

My plans have changed since my original application, do I need to tell you?

We understand not everything goes to plan. If you’re sure that your new plans will repay your mortgage, please let us know using the methods above.

My plans have changed and now I’m not confident I’ll be able to repay the balance at the end of the mortgage. Can you help?

That’s what we are here for, and we’ll always try our best to help. It’s important to be realistic about the value of your savings, endowment policies or investments. It’s best to talk to us as soon as you can if you’re worried your plans may not be enough to repay your mortgage – the sooner you tackle the problem, the sooner we can find a solution. It’s worth noting that the more time you have left on your term, the more options we have. Please call us as soon as possible on 01664 414145 or pop us an email at Retentions@mmbs.co.uk to arrange a time that suits you.

Alternatively, the Money Helper service provide some useful leaflets about your options.

Take Action with your Interest Only Mortgage now

Dealing with a shortfall for your Interest Only mortgage

I’m going to re-mortgage or get a term extension. Is that acceptable?

Yes, but we ask you to consider carefully whether this will work out well. We’ll always try to give you a term extension but it’s not guaranteed that we can. We have to consider your age and income. If it doesn’t seem affordable, we won’t be able to proceed with this request. If you cannot get a term extension, you may need to consider selling your property to repay the loan.

I’m planning on downsizing. What do I need to do?

We ask that you consider whether the sale of your property will leave you with enough money after repaying your loan to buy another property.

If not, it’s worth considering whether this is a suitable option for you. Please contact us to discuss this further on 01664 41415.

If so, we’d recommend you look at marketing your home 12 months before the end of your mortgage term. This will allow enough time for you to market and sell and for your solicitor to process the legal documents for your sale. Your solicitor can then contact us for a redemption statement when you have a completion date.

Where can I find independent help and advice about my mortgage?

We’re always here to talk to you about your finances, but there are other people you can talk to for independent help and advice. Here are some services that offer free, impartial support:

Money Helper Service: www.moneyhelper.org.uk

Stepchange: www.stepchange.org

Citizens Advice: www.citizensadvice.org.uk