Do you have an interest only Mortgage?
Some considerations on how to tackle paying off your interest-only mortgage
We recently picked up this article in the Telegraph following recent reports on interest only mortgages and thought it would be beneficial to share for those considering their own position.
For those of you with an interest-only mortgage and children too, solution number 6 might make for interesting reading!
More than 100,000 interest-only mortgages will mature this year – but that still leaves over 1.5 million interest-only home loans outstanding. Mortgage watchdogs fear many people in this position "do not have an appropriate strategy" to repay loans. The Financial Conduct Authority (FCA) has said it will investigate how lenders are treating borrowers as their mortgages approach maturity.
Billed as an easy way into the property market, interest-only mortgages were incredibly popular in the Nineties and peaked just before the financial crisis when they accounted for a third of all home loans.
Telegraph Money has identified the six best ways to pay off outstanding interest-only debt along with the risks that come attached with each decision.
Ways of repaying an interest-only mortgage
- Downsize property
- Extend your mortgage term
- Remortgage to a lower rate and overpay
- Use other savings and investments
- Release equity
- Ask your children for financial assistance
Solution 1: Downsize home
The simplest solution is to sell your home and move to a cheaper property. The proceeds from the sale will be used to pay off the outstanding mortgage balance. In many areas sluggish prices will have left homeowners who took out loans with small, or even non-existent, deposits in negative equity. That could mean that selling the property does not generate enough to pay off the mortgage. In any case buying in a cheaper area may not be an option, particularly if this would mean moving away from family and friends.
Solution 2: Extend your mortgage term
If you're unlikely to easily pay off your interest-only mortgage by the agreed date, one option is to ask the lender to extend the term. That gives you longer to save the capital. Problems: you're likely to battle to get the lender to extend the term if you're beyond a certain age or if you do not have adequate income. Most lenders cap the age of borrowers at 75 but some do, now, go on to 85. This strategy will generally only work for younger interest-only borrowers.
Solution 3: Remortgage to a lower rate and overpay
Millions of borrowers could save money by remortgaging, and this group includes many interest-only borrowers. The idea here is that if you can cut the mortgage interest costs, you can free up more cash toward paying off the capital part of the debt.
Solution 4: Use other savings and investments
If neither of the above mortgage-oriented strategies can work for you, you could instead focus on bringing together other savings and investments as a way of clearing the balance when the mortgage ends. Many people use the tax-free lump sum from their pension to clear their mortgage, for example (a quarter of the value of your pension can be taken tax-free).
Money built up inside ISAs or other accounts could also be used to clear the debt when due.
Solution 5: Equity release
Equity release sounds complex, but it's basically just another type of mortgage – one that remains in force until you die or need to go into care. So for some this will be a way of remaining in the property, without ever actually having to pay off their main, interest-only mortgage. There are downsides. This is not necessarily the best or cheapest route for everyone.
You don't usually make monthly payments at all. Instead, the lifetime mortgage means rolling up interest, on top of your original capital borrowed, until you die or need to go into care. At that point the debt is settled.
How much the debt builds up to depends on how long you live, as well as the rate at which your lifetime mortgage is charged. The resulting costs can be high, as the table below shows. It is always worth telling your children or other beneficiaries of your will that you're entering into this type of agreement ahead of time.
Solution 6: Get your children to pay
This is an extension of equity release. In recent years, lenders have become more flexible and have allowed equity release borrowers to pay interest on their loans – if they want to and can afford to. You usually pay a slightly higher rate for this flexibility.
One potential way of making this work is to get children or other family members to contribute the interest costs of the loan.
What if I do nothing?
Under the conditions of your mortgage, lenders have a legal right to repossess homes where loans have not been repaid by the end of the term.
Bank or building society staff are likely to suggest some of the solutions mentioned here – be sure to fully understand the implications before agreeing to anything.
This article was published in The Telegraph on 30 May 2017
Why not contact the mortgage specialists at McCreas to find out more about the best options for you if you currently have an interest-only mortgage and are considering any changes. You can contact us by email or call us on 0141 572 1340 to make an appointment. You can also read more about our mortgages services here.