Until recently, interest-only mortgages have become harder to come by. If you have an interest-only mortgage or are considering getting one, it is important to make a repayment plan for when your interest-only mortgage matures. We look at when an interest-only mortgage may be suitable and the repayment options available to you.
After the 2008 financial crash, mortgage lenders tightened the lending criteria around interest-only mortgages, while many simply stopped offering them. More recently, lenders have been loosening affordability rules, making interest-only loans more attractive to a wider range of borrowers. In September 2020, Coventry Building Society reintroduced deals followed by Nationwide, Barclays, Metro Bank and NatWest. There are 220 interest-only deals available today compared with just 185 in 2019, according to Moneyfacts.
Borrowers are attracted to interest-only deals rather than repayment mortgages as it lowers the monthly cost. Others opt to invest the cash they would have used for repayments on the loan, with the aim of invested funds growing more than the value of the loan itself. Some borrowers also use this tactic to repay their loan sooner than with a traditional mortgage.
Whether you already have an interest-only mortgage or are considering one, you will need to show proof of an acceptable repayment vehicle (equity, ISAs, pensions, shares, endowments). For advice on whether an interest-only mortgage is right for you, speak to our fee free mortgage brokers.
If you are considering whether an interest-only mortgage is a good idea so that you can free up cash to invest (with a view to earning more to repay your mortgage later), it is a good idea to get independent financial advice first.
If you are considering moving away from an interest-only mortgage, here are the options available to you:
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 a number of options and types of mortgages including switching to a repayment mortgage, paying into an investment or saving plan and using any spare cash to reduce the mortgage.
- 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.
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Consider whether downsizing is an option
- Any profit generated could help make repayments on a mortgage more manageable. You’ll need to consider the costs of moving and negative equity which may rule this out as an option. Read our guide Should I downsize?
Options if you are over 55
- Retirement interest-only mortgages may be a viable option.
- 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?