General mortgage q. Interest only mortgage. When it ends, you sell and keep the equity?

7 comments

1. When the 25 years is up you are asked to replay the 100k.

   You could do that by selling the property or through other investments – there used to be something called an “endowment mortgage” where rather than repay the capital you invested that money with the idea that the investment would grow faster than the rate of interest you would otherwise be paying. Due to the recession that wasn’t the case for a lot of people leading to some losing their homes when the repayment fell due etc.

   You could also possibly re-mortgage but that would depend on your employment status/prospects.

2. After 25 years pay the lender £100k. How you do that is up to you. You could save £100k, or you could sell the house hoping it’s worth at least £100k. If you don’t have savings or can’t sell the house for £100k you’re stuffed.

   I had a neighbour with an interest only mortgage. A few years ago their house was now worth less than the loan, so they couldn’t sell it.

3. You can’t buy the property with the equity. You have to repay the original loan. You can repay the mortgage with the equity and keep any profit you’ve made.

   You will still owe £100k and have to pay it back. If your household price doubles in 25 years, you’ll have the money to pay the mortgage back but you won’t own anything.

   Take my example. Bought my house in 2007 for £195k with a £175k loan. House now worth £300k. If my mortgage ended, I’d have to repay £175k so I’d have to sell the house but I would have £125k left. That would just about pay for a small 1 bed flat.

4. Usually with interest only mortgages you take out a separate endowment policy which matures when your mortgage is up and (in theory) yields enough to pay off the capital on the mortgage.

   There was a big scandal some years ago as a lot of people found that their endowment policies were insufficient to pay off the capital. They became a lot less popular after that.

   In theory you could do what you suggest. It’s unlikely that the property won’t have increased in value over the 25 years, but if for some reason you are unable to sell (e.g. discovery of a serious structural problem) you would then have to find another way to pay off the capital.

5. Yes. You own the property in full so any growth in its value is yours to keep. The mortgage is secured against it so if you sell the property you either port it and secure against the new place (and continue to owe the 100k) or pay back the 100k and clear the mortgage.

   To get an interest only mortgage you normally need a large deposit (25%+) and to demonstrate a sufficiently robust investment plan to build up 100k over the term of the mortgage.

   /r/UKPersonalFinance is a great sub if you have more detailed questions.

6. My first mortgage was interest only. In 1999 bought it for £50k with zero deposit. After three years sold it for £100k and walked away with £50k, wish I’d bought the street! I’m repayment now and coincidentally work within the interest only dept of a bank, you’d be amazed of how many customers get to end of their io mortgage term and think they have been paying the mortgage principal off.

7. When I was looking at different mortgage deals the broker kept pushing me to take an endowment mortgage . I kept asking him if the endowment would definitely pay off the debt . He kept showing me the upper end of the plan , explaining that it would pay off the debt and give me a few thousand extra . I persisted and asked if it was possible that the endowment would fail to cover the debt . Eventually he admitted it was possible but very unlikely . I took the repayment mortgage . Phew !