In the run-up to the financial crisis in 2008, millions of borrowers took out interest-only mortgages. Under this arrangement, borrowers paid an interest payment to their lender, but the balance of the mortgage never reduced. Instead, the mortgage was arranged on the basis that the capital would be repaid through the maturity of an investment, the sale of the property or other means.
According to the Financial Conduct Authority’s most recent review, around 2.6 million interest-only residential mortgages will mature between now and 2041.
If you have an interest-only mortgage, you’re not alone. However, if you don’t have clear plans about how you intend to repay the money that you borrowed, you could end up in a difficult situation at the end of your mortgage term. So, keep reading for ways that you can deal with your interest-only mortgage.
Have a plan in place to repay your interest-only mortgage? Don’t panic!
According to the latest figures from UK Finance, more than 125,000 interest-only mortgages are set to mature in 2020 with a further 550,000 set to end by 2027.
If you have a specific repayment plan in place for your interest-only mortgage, then you don’t need to panic. This may be:
- Savings or investments
- The sale of the property between now and the maturity of your interest-only home loan (assuming you are not in negative equity)
- A bonus or commission from your employer
- The sale of another asset (e.g. a second property)
- An inheritance
However, if you don’t have any plan in place to repay your mortgage, or your assets are insufficient to clear the whole mortgage, you should think about making alternative plans. Here are some ideas.
Convert your mortgage to a repayment basis
One way to ensure you will have repaid your mortgage by the end of the term is to change it to a capital and interest (repayment) basis.
When you do this, part of each payment you make goes towards repaying the capital you borrowed (the rest pays the interest on the loan). If you convert your entire mortgage to a repayment basis, you’ll ensure you repay the whole loan, as long as you keep up your monthly repayments.
Choosing this option will mean your repayments will be higher. So, to keep your mortgage affordable, you may also have to consider changing the term of the mortgage.
Extend your mortgage term
If you convert your mortgage to a repayment basis, you may have to extend the mortgage term in order to keep the monthly repayments affordable to you.
For example, a £200,000 repayment mortgage at an interest rate of 2.5% would cost around £1,885 a month over a ten-year term. Over 20 years your repayments would fall to £1,060 – but bear in mind that the total amount of interest that you pay will be significantly more if you take your mortgage over a longer period (around £28,000 in this example).
Even if you are not changing your mortgage to a capital and interest loan, you could still ask your lender to extend your mortgage term.
While this won’t change your repayments or reduce the amount you have to pay back, it will give you additional time to sell the property, or for your investments to grow so they are enough to repay the amount you owe.
Start making overpayments
If you start paying more than your standard interest payment every month, then this will help you to begin to reduce your debt.
Most lenders will allow you to overpay by up to 10% of your outstanding mortgage each year without incurring any early repayment charges. Check the terms of your mortgage to establish how much you can overpay.
Depending on how your mortgage is structured, you may be better off saving up £500 or £1,000 lump sums and paying these off your mortgage on an ad hoc basis rather than paying a few extra pounds every month.
Sell your home and move
If there is equity in your home, you may decide to sell your property and use the proceeds to repay your mortgage in full. You may then have sufficient funds left to downsize or buy a cheaper property.
Over 55? Equity release or a retirement interest-only mortgage could be an option
If you have an interest-only mortgage and you’re aged over 55, there are a couple of lending products that may be suitable for you.
Retirement interest-only mortgage
A retirement interest-only mortgage works in a very similar way to a traditional interest-only loan. You are required to make a monthly repayment equal to the interest on the loan, and the lender receives the capital when:
- Your home is sold
- A homeowner dies
- A homeowner moves into long-term care.
Figures from the Equity Release Council show that over-55 homeowners released £988 million from property in the third quarter of 2019.
Equity release does not require proof of any income or affordability. A lender takes a legal charge over your home in exchange for a cash lump sum, and you can use part or all of this lump sum to repay your existing interest-only mortgage.
Some equity release schemes allow you to ‘roll up’ the interest, meaning that you do not have to make a monthly repayment. Other schemes require you to pay the interest every month.
Get in touch
If you have an interest-only mortgage and you’d benefit from advice on the right solution for you, please get in touch. Email firstname.lastname@example.org or call (0207) 808 4120 to find out more.