Building a plan to repay an interest-only mortgage

An interest-only mortgage keeps the monthly payment low for many years.

The payments cover the interest. The amount borrowed, called the capital, is paid back in one go at the end of the term. With years still to run, there is time to build the money for that day. These notes draw on what the Financial Conduct Authority (FCA) and the Financial Ombudsman Service publish for borrowers.

What a repayment plan is

A repayment plan is how you intend to pay off the capital when the term ends. The Financial Ombudsman Service says people use money from different places, such as an endowment policy or savings. The whole of the capital is still due on the agreed date.

How other borrowers plan

In August 2022, research for the FCA asked 987 people with interest-only mortgages how they planned to repay. They could name more than one source. The most common were these.

In the interviews that followed, many people said they liked the sense of progress that paying off a lump sum gave them.

Tax-free ways to save

An Individual Savings Account (ISA) lets you save tax-free. In the 2026 to 2027 tax year you can put up to £20,000 into ISAs.

You can usually take up to 25% of a private pension as a tax-free lump sum, up to £268,275 in total. A scheme's rules decide when you can take it, and that is usually from age 55 at the earliest. It is worth knowing when that date falls compared with the end of your mortgage term.

Switching some or all of the loan to repayment

An FCA leaflet works through an example. A borrower owes £125,000 over 25 years at 3% interest. Interest-only payments are £313 a month, and the whole £125,000 is still owed at the end. The total paid comes to £218,750.

If the borrower switches to repayment with 15 years left, payments rise to £864 a month. The loan is cleared by the end, and the total paid falls to £192,881. Switching with 10 years left means £1,208 a month and a total of £201,092. The leaflet also shows paying off part of the capital and switching the rest. The FCA says its figures are only an illustration.

Keeping the plan on track

The FCA suggests checking your mortgage offer and latest statement for how much you owe and when it is due. Then check whether your plan will produce the whole amount by that date. If you plan to sell and buy somewhere smaller, check the value of your home from time to time.

The FCA says the earlier you talk to your lender or a mortgage adviser, the more choices you are likely to have, and you may save on interest. Free, impartial help is available from MoneyHelper, Citizens Advice and StepChange. If you cannot agree a fair way forward with your lender, the Financial Ombudsman Service can look at a complaint.

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