17.6% of mortgage holders could be at risk of losing their home if they don’t pay attention to how they will repay the outstanding debt.
Because they have interest-only mortgages which will soon reach the end of their terms, and a large lump sum will be due to bank or building society.
How do interest-only mortgages work?
With this type of mortgage, borrowers only pay the interest due each month, whilst the amount borrowed remains the same. When the mortgage term ends, the initial sum is due to be repaid in full.
What is the issue?
1.76 million people are at risk of falling into financial difficulty, as they do not have the resources available to make this repayment.
A Report from the Financial Conduct Authority (FCA) shows that lenders are doing more to engage interest-only mortgage holders in discussions surrounding their repayment options, but there are several factors which are making it hard for some clients to understand the process.
The popularity of interest-only mortgages has fluctuated over the years. By analysing the uptake rate, the FCA have identified three ‘peaks’.
The first cohort to access them have recently reached the end of their term, and the need for better engagement has become apparent to mortgage lenders and the FCA. However, the profile of this group means that they are likely to be more financially secure in their retirement and will not face many difficulties in paying their balance.
The concern is for the second and third peak. Those who accessed interest-only mortgages in the early 2000s were mostly less-affluent individuals who took the opportunity to convert their existing mortgage and unlock extra capital. These mortgages will mature in the next 10 to 15 years and could spell disaster for borrowers who are not prepared to pay the full amount when their term ends.
What are the options?
There’s one thing that you should not do if you have an interest-only mortgage due to end soon; ignore it and hope that it will go away. Your financial responsibilities are going nowhere. Ifthey are not dealt with appropriately, the consequences could outweigh the stress of facing them head-on. The most common course of action for non-payment is repossession of your property. So, start planning now to make sure that you still have a roof over your head when your mortgage ends.
The options facing you include:
1. Changing to a capital repayment mortgage
Your mortgage provider will be able to give you more information about this but changing your repayment type will ensure that you pay off the debt in a more manageable way.
If you have reached a point in life where a smaller home is more appropriate, you might consider selling your current house and moving into a more manageable property. This will free up the money needed to repay your mortgage, and you may even have some capital left over to reduce the payments on your next home.
3. Use your pension
The decision to use your pension fund to pay off debt is yours to make. However, it really should only be used in an emergency, as using pension funds now will mean that you have less to rely on for income during retirement.
4. Use other assets to pay your mortgage
Savings, assets and property can all be great sources of capital to repay your mortgage.
5. Equity release
Also known as a ‘Lifetime Mortgage’, equity release is a form of borrowing which is not repaid until you die.
Equity Release pays you a lump sum, secured against your property. That means that you can pay your mortgage and may even have some spare cash to treat yourself. Lifetime Mortgages don’t usually have monthly repayments. Instead, they are repaid from the sale of the property or when you die.
If you have an interest-only mortgage which is due to be repaid in the next 10 to 20 years, now is the time to begin thinking about how you will achieve that.
The simplest way to ensure that you have the capital in place to repay your mortgage is to seek financial advice, develop a plan and stick to it.
That’s where we can help.
So, to talk about your options, get in touch with us on 0207 808 4120.