What happens when your mortgage is paid off

Congratulations! If you are reading this blog, chances are, you are coming close to the end of your mortgage term!

At RH Financial Consultants, we get lots of questions from people about their mortgages. A common question we get is “what happens when I pay off my mortgage?”. Below, we answer this question along with how paying off your balance affects your eligibility for other financial products such as a remortgage.

What happens when your mortgage term ends

Most UK mortgages have a term of 10-35, and once this ends and all repayments have been made on the original loan and interest, the borrower is officially mortgage free!

If the owner doesn’t have any other debts secured against the property, then upon completing the mortgage repayments, they own all equity of the property.

As a homeowner, once the mortgage is paid off you can:

  • Remain living on the property and make use of your reduced outgoings.
  • You can move out and rent the property.
  • Sell the property and release your equity.
  • Remortgage the property to access your equity without having to leave the property.
  • Remortgage the property on a buy-to-let basis, rent it and use the property as a source of income.

Changes you might see to your credit score once your mortgage is paid off

As a mortgage is a form of debt, once it’s paid off you will likely improve your debt:income ratio and so you could see an improvement in your credit score shortly after. It’s unlikely you’ll see a dramatic increase, but everyone’s situation is different.

However, if you have a mortgage currently, missing repayments will very quickly have a negative impact on your credit score, and anyone who runs a credit check in the future will be able to see this information.

What happens when you pay off your mortgage early

Many lenders will charge an early exit or early repayment fee, as they will lose money if the loan is paid off early due to the interest payments.

Speaking to an expert financial adviser is highly recommended before you look at clearing a mortgage earlier, as you might be better off financially by making bigger repayments for a shorter period of time to avoid exit fees. In some cases, these fees can even outweigh the benefit of paying off your mortgage early.

Your financial adviser, can read through the terms of your mortgage and give specialist advice on the best steps to take for your individual financial situation.

When you pay off your mortgage early, it’s the same as repaying the full term, you’ll be able to enjoy all the benefits of living mortgage-free.

What happens when an interest-only mortgage ends

You will have to repay all the amount you borrowed when an interest-only mortgage ends. You can use investments, savings, a remortgage or property sale in order to cover the cost of settling the debt.

Most customers who are coming to the end of an interest-only mortgage will decide to remortgage instead of selling the home, although if you’re low income or fall into the older age group, it might be difficult to remortgage onto another interest-only mortgage.

If you cannot cover the cost when an interest-only mortgage ends, there are various ways to release equity, but you should seek out specialist financial advice that can consider your exact situation and create the right solution for you. It’s important to have an exit strategy and simply selling the property once the capital is due might not be enough to please lenders, as they will want to be assured of how the outstanding debt will be fully and reliably settled.

Are you coming to the end of your mortgage?

If your mortgage is coming to an end, get in touch with our specialist mortgage advisors and discover what the best steps are to ensure you do the best thing possible for your financial situation.