Interest-only mortgages

This content applies to England only.

Housing laws vary between England and Scotland. This page applies to England only. Get advice relating to Scotland

If you have an endowment or ISA mortgage, it may be possible to reduce your monthly payments to make it more affordable. If this isn't possible, you may be able to sell your investment or switch to a more flexible mortgage. You'll have to negotiate and you may have to pay a fee.

When you are working out your options, it helps to look at your mortgage interest payments and your investment (usually an endowment or ISA) separately. You could also consider asking your lender to add the arrears to the rest of your mortgage.

Mortgage interest payments

Your lender may accept reduced interest payments for a short while if, for example:

• you are trying to sell your home
• your problems are short term and you will be able to meet the full interest and investment (endowment or ISA) payments in the near future
• you need to keep up your investment payments if the policy is due to pay off your mortgage in the near future
• you need to keep up your investment payments (including life insurance) because either you or your partner have a life-threatening illness

Investment payments

If you've been paying the endowment premiums for a long time you may be able make an agreement to stop payments (called 'freezing the policy') for a short while. You would have to catch up with missed payments later on. Your lender and the insurance company will usually only agree to this if your problems are temporary.

It may be possible to reduce the monthly payments on the endowment policy, pension or ISA that is linked to your mortgage by switching to a new one. The size of the reduction usually depends upon the type of policy you have now and the one that you switch to. There will be fees and risks involved, so you need to get independent financial advice before making a decision.

Adding the arrears to your mortgage

It may be possible to add any arrears you have to the rest of your mortgage ('capitalise the arrears'). It will mean that you can pay off any payments you have missed over the rest of the mortgage term. You will probably have to make higher monthly payments.

You can normally only add your arrears to the rest of your mortgage when your financial situation improves. Most lenders will usually expect you to meet your regular mortgage repayments for at least six months before they will agree to it.

Selling your investment

You may be able to pay off some of your mortgage by selling your investment. If you've been paying into your investment for at least two years, it may have a ' surrender value'. This is the amount the investment company will pay if you end the policy.

You may also be able to sell your investment privately (usually through a broker or independent financial adviser). This often means you get a higher price but is usually only possible if you have been paying into your investment for a number of years.

Selling your investment can help to reduce your monthly payments in the short term, but means you will no longer have any means of paying off everything you originally borrowed. Your lender therefore won't let you do this unless you can show that you have made other arrangements, such as:

• buying a new investment, or
• switching to a repayment mortgage

If you switch to a repayment mortgage and have a partner or dependents, it may be a good idea to take out separate life insurance. This may be needed to pay off your mortgage, protecting your family from long-term debts if you die.

Switching to a repayment mortgage

If you can't reduce your interest or investment payments, you could consider switching to a repayment mortgage. It is sometimes possible to stop your investment payments temporarily while you arrange this.

Switching to a repayment mortgage won't necessarily reduce your total monthly payments (for interest and your investment). They are usually cheaper when interests rates are high (above 11%, for example) but work out more expensive when interest rates are low. However, repayment mortgages are also less risky because they are guaranteed to pay off everything you owe.

They are also more flexible and it's usually easier to extend the mortgage term. This gives you longer to pay off your mortgage and can make your mortgage more manageable in the long run.

Getting help and advice

Depending on which option you choose, you will have to negotiate with your mortgage lender and/or the company that manages your investment. This can be complicated. You can get free advice from a housing aid centre, citizens advice bureau or other advice agency. Many have specialist advisers who can help you negotiate. Use our directory to find a service in your area.