My Interest-Only Mortgage is Ending – What Can I Do?
Thousands of interest only mortgages are maturing every year and lots of mortgage-holders are not prepared to repay the capital sum owed. Here I examine how this situation has occurred and what can be done.
WHAT IS AN INTEREST ONLY MORTGAGE?
Interest only mortgages remain popular amongst buy to let applicants who buy up properties for extra income but in the 80’s and 90’s most residential mortgages were set up this way. The idea was that you would only pay back the interest on the money you owed and you would pay back the capital lump sum at the end of the term.
When you took out an interest-only mortgage you may also have been advised to set up a repayment vehicle such as a low-cost endowment policy. The policy would then mature and was designed to repay the capital balance in full whilst also providing life cover through the term.
Unfortunately, many people weren’t made aware of the risks attached to these products, in particular, that there was no guarantee the policy would mature for a sufficient amount to repay the mortgage debt and this led to many applicants being compensated for being mis-sold to.
WHY HAVE PEOPLE STILL GOT THESE MORTGAGES?
It’s unlikely that you will have taken out an interest-only residential mortgage in the last few years as they are fairly difficult to get unless you can prove a robust strategy for paying back the capital. If you took out an interest-only mortgage in the late 80’s or 90’s and have not switched it to a capital repayment then it could be maturing soon and action needs to be taken.
WHAT CAN BE DONE?
If you have found yourself in this position it is highly likely that your mortgage lender will have been writing to you asking how you intend to repay the capital. It’s vital that you keep the line of communication fully open with them, they will not want to take your property into possession and will only do so as a last resort.
Here are some of the options you can consider:
- Ask your lender to convert to a repayment mortgage
- Sell your property and consider down-sizing
- Use savings/other investments to repay the outstanding balance
- Remortgage to a new lender
- Consider a Retirement Mortgage
The retirement mortgage market is thriving at the moment, largely due to the number of interest only mortgage reaching cessation with no repayment plan in place.
There are far more retirement products available these days and some providers let you service the interest element by way of regular monthly payments.
This means that when you die the capital balance is repaid from the house sale and the surplus passes to your family.
CAN I STILL GET AN INTEREST ONLY MORTGAGE?
Interest only mortgage still have their place, for example, you may have a portfolio of properties or other investments in place to repay the money you have borrowed. Lenders will now want to examine your strategy for repaying the loan much more deeply than they did in the past to ensure they are not left with a mortgage on their books which could default.
They will want a big deposit to go down, possibly as much as 50%. They will also want to “sense-check” your plans, for example, will you have enough equity in your home to be able to down-size to a reasonable property at a later date.
As always, we’re happy to run through your options and see if we can help.