There are currently 46% fewer outstanding interest-only mortgages than there were six years ago, according to UK Finance.
Interest-only mortgage holders only pay the interest due on the amount they have borrowed, each month, with the full amount coming due at the end of the mortgage term.
The fact that the number of outstanding interest-only mortgages has fallen is a sign that many have either repaid in full or have switched to a capital repayment mortgage.
However, that does not reduce the danger faced by those who still have an interest-only mortgage which is due to end within the next few years.
There are several reasons why a mortgage borrower may have found themselves with an interest-only mortgage, all of which are reasonably historical, as updated mortgage lending rules make it very difficult to obtain an interest-only mortgage on residential property.
So, what’s the problem?
Time for a brief history lesson…
Firstly, in the 80s and 90s, many borrowers took out interest-only mortgages, and put in place an investment vehicle such as an endowment or PEP (Personal Equity Plan). However, over the years, many of these investment vehicles were cashed in for other reasons, or defaulted, leaving the borrower with no way to repay their mortgage.
Secondly, during the heady days of the post-millennium housing boom, when property prices soared, and lending criteria were significantly more relaxed than they are now. Many lenders were prepared to advance mortgages on interest-only terms without seeing proof of a repayment strategy. The long-term effects of those decisions, by both lenders and borrowers are now becoming very real.
The problem is simple: if you do not have the capital to repay an interest-only mortgage, you need to act quickly, or you will likely find yourself in financial difficulty. It’s not worth apportioning blame but the reality is, no matter the reason behind the debt, time is now running out and interest-only mortgage holders need to take stock of their situation and find a way to repay their mortgage which suits them.
What are the options?
If you have an interest-only mortgage which is due to end within the next few years, and you know that you are unable to make the final repayment in full, you face five key options:
- Switch to a capital repayment mortgage: This will push up your monthly outgoings but will guarantee that your mortgage is repaid at the end of the term(Providing all payment are made on time) . Ideally, it should be repaid by the time you retire, and your financial planner will help you to understand the interaction between your mortgage costs, current income and outgoings and preferred retirement date.This will help you to understand whether repaying before your retirement date is achievable.
- Extend your mortgage term: Switching your mortgage onto a capital repayment basis over the existing term may be unavoidable. One option, therefore, is to extend the term, giving you longer to repay the outstanding debt. Naturally, you need to have the income to make the monthly repayments. That can make extending your mortgage term into retirement problematic, which is why financial planning is so important.
- Using other assets: While your endowment may be long forgotten about, you may have other savings, investments, pensions and assets available. There are pros and cons with each, for example taking large lump sums from your pension may trigger significant tax payments. However, matching assets with debt is a sensible option and could be your only option.
- Downsizing: You could decide to sell the property, using the money released by doing so to repay the mortgage.
- A combination of the above: It is unlikely that you will know the most suitable way to repay your mortgage without the help of a professional, so consult a financial planner or adviser to find out the best ways to combine methods and find a solution to meet your needs.
Top tips for interest-only mortgage holders
Whether your capital repayment is due in three years, or 20, there are a few things you can do now to make it easier to pay off your mortgage in full, these include:
- Taking swift action: The longer you put it off, the less time you will have to make repaying your mortgage easier on you.
- Talking to your mortgage provider: They will be able to explain your options and help you to choose the path which best suits your needs.
- Engaging with a financial adviser or planner: Talking to a professional who is impartial and not connected to your mortgage provider can give you a new perspective on your situation and offer you solutions you may not have thought of before.
To discuss how you will repay your interest-only mortgage when the time comes, get in touch with us.
Your home maybe repossessed if you do not keep up repayment on your mortgage.