Every year we see thousands of Interest-Only Mortgages in Manchester reaching the end of their terms, by which some are not able to fully pay off their mortgage. Here we will explain what they are, the situations people face and what to do if you are on one.
Residential Interest-Only Mortgages were all the rage back in the 1980’s and 1990’s. The idea behind these would be that you pay interest on the capital owed, then when you reach the end of the term you pay a lump sum. Borrowers were often advised to set up an “Investment Vehicle” at the same time.
These were low-cost assets offered by investment companies, with the hopes of increasing the worth of their money, so they could pay off the lump sum at the end. In some cases, these investments may even provide a surplus as well as paying off the mortgage. Investment Vehicles also acted as a means of providing life cover, in the unfortunate event of the borrower becoming ill or losing their life.
Many borrowers were not informed of the potential risks involved with Interest-Only mortgages. The investment companies simply could not guarantee that their investment would grow enough to pay off the mortgage, with some customers not even investing full stop. There were a large amount of complaints, with thousands receiving compensation if they were mis-sold to.
These days we mostly find that the people taking these out are landlords using them for Buy to Let Mortgages. This is because some landlords like to maximise their monthly profits.
It has been a fair while now since we have seen any popularity in Endowment Mortgages. People may still be on them and have not managed to get them switched into a Repayment Mortgage yet. If this is you, you may be worried about losing your home because of it.
It may still be possible to get an Interest-Only Mortgage, but with stricter rules now in place it is less likely to be seen or cause any problems. Not all lenders offer interest only and those that do have very strict criteria, such as an approved repayment vehicle in place and a larger deposit.
Though it is not unheard of for lenders to surprise the borrower by requesting full repayment of the balance, this would normally only occur if the lender had slacked on communication. Lenders regularly write to the borrowers, to ensure they know they need to make capital repayment plans.
If you are reaching the point of repayment and realise you have no means to repay the capital, please communicate and be fully open and honest with the lender. This will not be the first time they have encountered this situation and they just like to be in the loop with where you stand.
Contrary to the belief of some, lenders do not like repossessing properties from people who cannot pay back, however they need to make their money back somehow so will do this as a last resort.
On a similar note to the last point made, there are now a lot more Retirement Mortgage options available to borrowers now than there have been in the past. If you happen to qualify for one of these options, you may continue to pay interest as a means of protecting the equity you have in the property.
On the flip side, if you are not worried about leaving inheritance to your children, you can allow interest to roll up and cease making any mortgage payments altogether.
A major problem with Equity Release Mortgages is usually the Loan to Value. To qualify for one of these, especially if you are in your 60’s, you need to have a decent amount of equity in the property already.