Interest Only Mortgages
Many experts are concerned with the number of interest-only mortgages that are due to mature this year, fearing that borrowers do not have a strategy to repay their lump sums. Put forward as an easy way onto the property ladder, interest-only mortgages were a popular product in the nineties when they accounted for a third of all home loans.
How can I pay off my outstanding interest-only debt?
The simplest solution is to sell your property and move to a cheaper one so that the proceeds from the sale can be used to pay off the outstanding balance. However, many homeowners with small deposits will be in negative equity which means that selling the property will not generate enough cash to pay off the mortgage.
Mortgage extensions - Can i extend my mortgage terms instead?
It is possible to ask lender to extend your term to give you longer to save for the lump sum. This could give you the chance to switch at least some or all of the loan to a repayment mortgage, as by extending the term, your monthly repayments will be lower and more affordable. This strategy will only work on younger borrowers and the chances are that your monthly repayments will be high, so you will need to assess your affordability before committing.
What about remortgaging?
You could save money by remortgaging and, if you can cut the mortgage interest costs in doing so, you can free up more cash towards paying off the capital part of the debt. If you want to remortgage, you will need to go through the mortgage application process which mean a lender will look at your income and affordability, including other debts etc.
Can I just use my savings and investments?
You could. If you’re of the right age, you could use the tax-free lump sum from your pension to clear your mortgage. Pension rules introduced in 2015 means that money can be drawn out in large sums, with 25% being tax-free. After this, however, it will be taxed as income, so you should be careful.
What about my endowment policy?
If you’re an older borrower, you were probably sold an endowment policy in the nineties. This means that you would have been told that, if you contributed to a savings plan for the length of your mortgage, you would be left with a large sum at the end. However, endowment policies under-performed, and their high charges meant that there were huge shortfalls in practice, with many cashing in their policies early.
If you happen to have an endowment plan still going, you should look at the latest maturity projection figure and this will give you an indication of what you will get at the end.
Equity release is essentially a mortgage that remains in force until you die or go into care, available only to borrowers over 55 years old. This could be a way of staying in your property without ever having to pay off your main interest-only mortgage. The most common way to release equity is through a lifetime mortgage, which is where you don’t make monthly payments. Instead, the lifetime mortgage rolls up interest on top of your original capital borrowed and is settled when you die.
For example, you could have a home worth £300,000 and an interest-only mortgage of £30,000 which is due to paid off in five years’ time. If you’re worried that you won’t have the £30,000 in five years’ time, you could opt to release £30,000 equity when your mortgage becomes due. If you do this, you won’t make any repayments, but the debt will roll up, with interest. When you die, the amount you owe will be taken from the sale of the property, with anything left going to your beneficiaries.
What if I don’t do anything?
Doing nothing is the worst option in this situation. Lenders are legally obliged to repossess your home if you don’t repay by the end of the term, though the Financial Conduct Authority (FCA) have told lenders that they should treat customers fairly. The agreement from the FCA means that lenders should help borrowers by giving them enough time to weigh up their options for a repayment plan etc.
For advice on your interest-only mortgage, speak to one of our expert advisers who will be able to help you with the next steps.