What should I do about my interest-only mortgage?
If you have an interest-only mortgage don't stick your head in the sand. Read on for practical next steps.
With stricter regulations on the way, lenders have already tightened the lending criteria around interest-only mortgages, while many have simply stopped offering them. As these deals come to an end, borrowers will find similarly affordable options very limited and will need to show proof of an acceptable repayment vehicle (equity, ISAs, pensions, shares, endowments) if they wish to switch providers. In our report On the Edge we revealed nearly 300,000 homeowners fear they will have to sell their home to repay their interest-only mortgage, and over 400,000 worry they will no longer be able to afford repayments. If this sounds familiar then the following independent advice should help.
Review your existing mortgage deal and repayment plan
- If you have an interest-only mortgage already, then check your paperwork or speak to your existing mortgage lender to find out when it is due to end and what you owe.
- Once you have all the information, review your payment plan. If you have significant equity in your property and a repayment vehicle that is working well, then you are in a good position. But if you don’t, you may find it either difficult to remortgage when your existing deal comes to an end or that you are unable to make the capital repayment and risk losing your home.
- If you took out an endowment policy to repay your capital check that it is paying out enough to repay the mortgage at the end of the term. It has recently emerged that even the top policies are returning payouts as small as £35,000 compared to well over £100,000 at their pre-crunch peak.
- If you don’t have a payment plan, put one in place as soon as possible. There are options including switching to repayments mortgage (see below), paying into an investment or saving plan and using any spare cash to reduce the mortgage (see below)
Speak to your mortgage adviser about over-paying
- If you have any slack in your finances use it to overpay as much as you can to help reduce the loan to value in your property
Consider moving to a repayment mortgage
- If your current interest only deal is coming to an end or you are worried you won’t save enough to repay it, then move to a repayment mortgage. It will mean higher monthly repayments but will mean you are paying back some of the capital as well as the interest each month
- Ask your current lender what mortgage deals are available to you and then assess against what else is available on the open market.
- An independent mortgage broker with a whole market view will be able to tell you which, out of the mass of mortgages available, are the ones most appropriate for you. As a first port of call check out our Remortgaging made simple guide.
Consider whether downsizing is an option
- Any profit generated could help make repayments on a mortgage more manageable. You’ll need to consider the hidden costs of moving and negative equity which may rule this out as an option.
Options if you are over 55
- Many of the bigger banks will lend into retirement but they will often have an upper age cap, with the majority asking for loans to be repaid before your 70th or 75th birthday. This means that if you’re aged 55 and over, you would have to pay the mortgage back in 20 years rather than the standard 25 years. See more guidance on mortgages for over 55s.
- Equity release schemes enable older homeowners to tap into the value of their property without the need to sell up and move out. This equity can be used to pay down what you owe. However, do seek advice on any risks involved. See our guide on Is equity release right for me?