Lots of people come to us with questions about their current mortgage agreement, often wondering what happens once the balance is paid in full and how that affects their ability to get a remortgage in the future.
Others with interest-only mortgages seek advice on how they can switch to a better deal before their term ends in a bid to save money or avoid having to move out in the event that they can’t repay the capital of their loan.
If you’re coming up to the end of your mortgage contract, you might be curious too. Read our short guide to learn more or reach out to a broker online using our chat box or enquiry form.
Does my credit score improve when I pay off my mortgage?
A mortgage is a form of debt and by clearing it, your debt-to-income ratio would likely improve. Your credit report would update shortly after your mortgage is paid in full, though your credit score is unlikely to dramatically increase.
Everyone’s situation will be different and the amount of debt a person has is just one factor that affects their credit score.
Missing mortgage repayments, however, can be a quick way to negatively impact your credit score and future lenders will be able to see this information when making a decision about whether you’re a safe borrower i.e. someone that has a good track record of keeping up with their financial responsibilities.
What happens at the end of my mortgage term?
Most mortgages in the UK span between 10-35 years and once the end of the term time has been reached and all repayments for the original loan and interest have been settled, the debt will be paid off.
If the homeowner has no other debts secured against the property, they own 100% of the properties’ equity.
What happens when you finish paying off your mortgage?
Once a mortgage has been cleared the homeowner can either:
Continue to live in the property and enjoy their reduced outgoings
Sell up and make use of the money made from the sale
Remortgage the property with a residential mortgage to access money without having to sell and move elsewhere
Remortgage to a buy-to-let agreement and rent the property out for income
Is there a disadvantage to paying off a mortgage?
You’ll have to repay your loan on time and in full to meet the terms and conditions of the financing agreement you have with your mortgage lender.
Repaying a loan can help to show future lenders that you’re a trustworthy borrower but there can be disadvantages to repaying a mortgage early.
Firstly, if you have access to money that can be used to clear your mortgage early, it can be worth considering holding on to it or investing it into a savings or investment account, as this can improve your liquidity.
You may need quick access to funds in the future and drawing out money from accounts may be more efficient versus trying to release equity from your property or remortgaging.
What happens when you end a mortgage early?
Repaying a mortgage early can be a great relief and a huge milestone for many homeowners who have long wished to see the back of their mortgage repayments after a likely 25 years of reducing the balance.
Many mortgage providers charge their borrowers early exit fees or early repayment charges, in a bid to make back some of the money they will lose in interest if the loan is repaid early.
Check the terms and conditions of your mortgage agreement before clearing a mortgage early or making bigger mortgage repayments because the cost of any exit fees or penalty charges could outweigh the benefit of clearing the loan early.
Calculate how much it will cost you to repay a mortgage early with a broker if you feel unsure about which penalty fees apply to you and whether it will be worth it.
They can check the terms and conditions of your contract and advise you on what your next steps could look like with various scenarios, should you choose to repay early, extend your agreement or remortgage with a new lender.
Can I remortgage if I have paid off my mortgage?
Yes. This is referred to as mortgaging an encumbered property. Getting a mortgage on a property that is owned outright potentially puts you, the owner, in a strong position because the previous lender has removed any charge they once had against the property.
That means that if you were to continually miss repayments for your new mortgage (also known as defaulting), the new lender could retrieve any losses from repossessing the property, with the knowledge that no other lender has any legal charge that could slow down or prevent them from settling the debt.
In conclusion, lenders can prefer borrowers with larger amounts of equity because it offers security against the loan and reduces their risk of a large loss.
You may be able to access more competitive rates of interest with the help of a mortgage broker too, though your unique circumstances will affect this too.
A mortgage broker can talk you through your available options if this is something you’re interested in and can explain the pros and cons of getting a remortgage on a property that is already paid off.
What happens when an interest-only mortgage ends?
An interest-only mortgage agreement stipulates that the borrower repays the interest of their loan over the duration of the term.
The capital is payable at the end of the term and can be paid using savings, investments, via a remortgage or through selling the property and using the proceeds to settle the debt.
Can I remortgage to an interest-only mortgage agreement?
Lots of interest-only mortgage customers reach the end of their term and decide to remortgage as an alternative to selling their home, though be aware that remortgaging to another interest-only loan may be difficult if you’re an older borrower or on a low income.
Your chosen lender will want to see a plan for how you are going to repay your interest-only mortgage and a low income or an income that is due to decrease upon retirement in the near future, can dissuade some lenders and it is unlikely you will meet the mortgage affordability criteria unless you have very good pension arrangements.
An exit strategy will be very important to interest-only mortgage lenders and a plan to sell the property at the end of the agreement when the capital is due, may not be good enough for the majority of lenders who will be keen to know how the balance will be settled in full.
What are my options if I can’t repay the capital of an interest-only mortgage?
If you reach the end of your current interest-only mortgage agreement and you can’t repay the capital of the loan, you may have some other options depending on your financial situation.
Speak to your current lender about switching to a repayment mortgage
Switch a portion of your current mortgage to a repayment agreement, leaving part on an interest-only agreement
Extend your current interest-only agreement to give you more time to repay
Remortgage with a new lender with more affordable terms
Sell your home to clear the debt. Your property may have even increased in value, leaving you with money left over to be put towards a deposit for another home
How to remortgage an interest-only mortgage
Depending on your circumstances, remortgaging could be possible with many UK lenders; it’s all about finding an affordable deal with terms and conditions that work for your situation.
A mortgage broker can look through your paperwork for your current interest-only mortgage deal to check for any unfavourable clauses that could cost you money, should you decide to remortgage either with them or another lender.
They’ll give you a clear overview of your available choices too so you can see exactly how remortgaging with different lenders under different terms could affect your finances.
If upon meeting or speaking with you they feel that a remortgage might not be the most financially viable or affordable route, they’ll check your eligibility for alternative options such as Equity Release or explain the pros and cons of other routes like downsizing to a cheaper property.
Do I have to remortgage with the same lender at the end of my term?
Absolutely not, there are hundreds of lenders throughout the UK and just because you have been with the same lender for years, it doesn’t mean you shouldn’t look elsewhere for a better deal.
Neglecting to look at other lenders could mean you miss out on a deal that could save you money or one that has terms and conditions with greater flexibility or lower fees, should you choose to repay early in the future.
Whether your mortgage is due to end soon or you still have years of your repayment term left, our team have been trained to locate and compare lenders on a range of factors including:
Early exit fees / early repayment charges
Deposit size requirements
Mortgage product incentives
Customer satisfaction levels
They look at a multitude of banks and lenders to find financial agreements with terms that suit your circumstances and allow you to affordably access the funds you need.
Check the market for a cheaper mortgage lender today. Lending criteria for remortgages and mortgages on properties that are owned outright changes all the time, so for accurate information that can be relied upon for decision making, contact a Mortgage Hut broker.