The majority of mortgages in the UK span between 10-35 years, and once you reach the end of the term time and all repayments for your original loan and interest have been paid, the debt will be cleared if it is a capital and repayment mortgage. If you have no other debts secured against your property, you will own 100% of the home’s equity. Some people have questions regarding getting a mortgage, but you might also want to know what comes next when you pay off your mortgage. We have answered some of the most common questions about this topic below.
Does your credit score improve when you pay off your mortgage?
A mortgage is a type of debt and by clearing it, your debt-to-income ratio would probably improve. Your credit report would be updated shortly after your mortgage is paid in full, though your credit score is unlikely to increase dramatically. Everyone’s situation is different and the amount of debt a person has is just one factor that has an affect on their credit score.
However, missing mortgage repayments can quickly have a negative impact on your credit score. Future lenders will be able to see this information when deciding whether you are a safe and low risk borrower i.e. someone who has a good track record of keeping up with their financial responsibilities.
What will happen when you finish paying off your mortgage?
Once you have cleared your mortgage you will have a few options on what to do next. They are:
- Keep living in the property and enjoy the decrease in your monthly outgoings.
- Sell the property and make use of the money you earn from the sale.
- Remortgage the property with a residential mortgage to access money without having to sell up and move somewhere else.
- Remortgage to a buy-to-let agreement and rent out the property for income.
Is there a disadvantage to paying off your mortgage?
You will have to repay your loan on time, and in full, to meet the terms and conditions of the finance agreement you have with your mortgage lender. Completely paying back a loan can help to show future lenders that you are a trustworthy borrower, but there can be a couple of disadvantages to repaying your mortgage early.
Firstly, if you are able to access money that can be used to clear your mortgage early, it could be worth considering holding onto it or investing it into a savings or investment account, as this can improve your liquidity. Also, you might need quick access to funds in the future, and taking money out of accounts could be more efficient than trying to release equity from your property or remortgaging.
What happens when you end your mortgage early?
Repaying a mortgage early can be a big relief and a significant milestone for many homeowners who have wanted to see the end of their mortgage payments after a likely 20+ years of lowering the balance gradually. A lot of mortgage lenders charge their borrowers early exit fees or early repayment charges, in an attempt to make back some of the money they will lose in interest if the loan is paid back early.
Be sure to check the terms and conditions of your mortgage agreement before you clear a mortgage early, or make bigger mortgage repayments, as the cost of any potential exit fees or penalty charges could outweigh the benefit of paying off the loan early. You should work out how much it will cost to repay your mortgage early with a financial adviser, like our team at Finance Advice Centre, if you feel uncertain about which penalty fees may apply to you and whether it makes financial sense for you.
Your expert adviser can check the terms and conditions of your contract and guide you on what your next steps might look like with various scenarios, whether you choose to repay early, extend your agreement or remortgage with a different lender.
Can you remortgage if you have fully repaid your mortgage?
Yes, it is known as mortgaging an encumbered property. Applying for a mortgage on a property that is owned outright could potentially put you, the owner, in a good position because the previous lender will have removed any charge they once had against the property.
This means if you were regularly missing payments on your new mortgage (referred to as defaulting), the new lender could retrieve any losses from repossessing the property, with the knowledge that no other lender has any legal stance that could slow down or prevent them from settling the debt. With this in mind lenders can prefer borrowers who have large amounts of equity because it offers security against the loan and reduces their risk of a big loss.
You might be able to access more competitive interest rates with the help of your finance adviser, though your personal circumstances will affect that too. An experienced adviser from our team can discuss possible options with you if it is something you could be interested in and can lay out the advantages and disadvantages of remortgaging a property that has been repaid.
What happens when you come to the end of an interest-only mortgage?
An interest-only mortgage agreement states that the borrower repays the interest of their loan over the length of the term. The capital is payable at the end of the term and could be paid using savings, investments, through a remortgage, or selling the property and using the money earnt from the sale to settle the debt.
Can I remortgage to an interest-only mortgage agreement?
Many interest-only mortgage customers come to the end of their term and decide to remortgage as an alternative to selling their home. Although, you should be aware that remortgaging to another interest-only loan could be difficult if you are an older borrower or on a low income.
The lender you choose will want to see a plan for how you are going to repay your interest-only mortgage. A low income or an income that is expected to decrease upon retirement in the near future, can deter some lenders and you may not meet the affordability criteria unless you have very good arrangements for your pension.
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 owed, might not be good enough for most lenders who will be keen to know how the balance will be settled in full.
What are your options if you can’t repay the capital of an interest-only mortgage?
If you get to the end of your current interest-only mortgage agreement and you can’t repay the capital of the loan, you might have some other options depending on your financial situation. For example, you could:
- Talk to your current lender about changing to a repayment mortgage
- Change a part of your current mortgage to a repayment agreement, leaving some on an interest-only agreement
- Extend your current interest-only agreement to give you more time to repay what you owe
- Remortgage with a different lender with more affordable terms
- Sell your home to clear the debt. Your property might have even increased in value, leaving you with money left over that can be put towards a deposit for a new home
How to remortgage an interest-only mortgage
Depending on your situation, remortgaging could be possible with a lot of UK lenders, it is all about finding an affordable deal with terms and conditions that work for your circumstances.
A mortgage or finance adviser can look through your paperwork for your current interest-only mortgage deal to check for any unfavourable clauses that could cost you money if you decide to remortgage, either with them or another lender. You can get a clear overview of your available options too so you can see exactly how remortgaging with different lenders under different terms could impact your finances.
Do you have to remortgage with the same lender at the end of your term?
No, definitely not. There are hundreds of lenders throughout the UK, and just because you have been with the same lenders for a number of years, it does not mean you shouldn’t look somewhere else for a better deal. Failing to look at other lenders might mean you miss out on a deal that can save you money, or one that has terms and conditions with more flexibility or lower fees, should you decide 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 professional advisers have experience in locating and comparing lenders on a range of factors including:
- Arrangement fees
- Early exit fees/ early repayment charges
- Interest rates
- Deposit size requirements
- Mortgage product incentives
- Customer satisfaction levels
They will look at multiple banks and lenders to find financial agreements with terms that will suit your circumstances and allow you to affordably access the money you need.
Contact Finance Advice Centre today if you have any questions or need help with mortgage matters.
As a mortgage is secured against your home or property, it could be repossessed if you do not keep up the mortgage repayments.