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 are having problems paying your mortgage, then you may be able to negotiate with your lender to reduce the amount you have to pay each month.
With an interest-only mortgage, you pay interest to the lender but you don't repay any of the capital (the amount you originally borrowed) until the end of the term. Instead, you pay into a long-term savings plan (usually an endowment, an ISA or pension). This should hopefully pay off the outstanding amount you owe when it matures, although it isn’t guaranteed to do so.
Temporarily reducing payments
Your mortgage lender might agree to reduce your monthly payments, or allow you to stop making payments temporarily, although both these options could:
- increase your repayments in the long-term
- increase your chances of ending up with an endowment shortfall.
Your mortgage policy may allow you to stop making payments, sometimes even for up to 12 months. This is called 'freezing' the policy – but you will need to make up these payments at a later date. The company which holds the endowment policy (normally an insurance company, or other investment organisation) will normally only agree to a freeze in your payments temporarily if you have been making your endowment payments for a while.
Alternatively, it may sometimes 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 on the type of policy you have now and the one that you intend to switch to.
There will be fees and risks involved – in many cases getting out of a long-term investment early will mean that you lose money. So you need to get independent financial advice before making any decisions.
Selling your investment
You may be able to pay off some of your mortgage by selling the endowment policy, ISA or pension that is linked to it. 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. However, bear in mind that the earlier you sell, the lower the surrender value will be. In many cases you may not even get back as much as you have paid in to date.
You may also be able to sell your investment privately (usually through a broker or independent financial adviser) but this is normally only possible if you have been paying into your investment for a number of years. Selling the investment privately often means you get a higher price.
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 at the end of your mortgage term. 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.
Switching to a repayment mortgage
You could consider switching to a repayment mortgage. Doing this will not normally reduce your total monthly payments but may be worthwhile if you can also:
- extend the mortgage term - this could reduce your monthly payments but would mean that you end up having to make repayments over a longer period of time.
- switch to a more flexible mortgage (ie one that allows you to make extra payments and/or take ‘payment’ holidays when you need to).
It is sometimes possible to stop your investment payments temporarily while you arrange to switch.
Repayment mortgages are less risky than interest-only mortgages in one sense as they are guaranteed to pay off everything you owe – not leaving you with the potential for a shortfall.
If you do switch to a repayment mortgage and have a partner or dependents, it may be a good idea to take out separate life insurance as you will no longer be covered by your endowment. This may be needed to pay off your mortgage and to protect your family from long-term debts if you die or if you suffer serious injury.
Adding the arrears to your mortgage
It may be possible to add any arrears you have to the rest of your mortgage – this is often called 'capitalising the arrears'. This will mean that you can make up any payments you have missed over the rest of the mortgage term. You will probably have to make higher monthly payments, unless you are able to extend the term of your mortgage (see above).
You can normally only add your arrears to the rest of your mortgage when your financial situation improves. Most lenders will expect you to meet your regular mortgage repayments for at least six months before they will agree to it.
Scheduled repayments
If you think your situation will improve your lender may agree to vary your arrears payments, whereby you pay off less in the beginning and more later - this is known as scheduled repayments
Getting help and advice
Negotiating with your lender can be complicated. Contact Shelter's dedicated homeowner helpline on 0300 3300 515 or use our directory to find a local advice service.
The best solution usually depends on the type of mortgage you have, your age and personal circumstances, how much you owe, how much you can afford to pay each month, and how many years are left on your mortgage.
Reducing your mortgage payments in the short-term will increase your repayments in the long-term.
