In the past, getting an interest only mortgage was actually a very intelligent way to afford the repayments on your dream home. The notion was that, as long as you linked a savings plan or investment vehicle to the mortgage, it would be no problem to pay off the outstanding amount at the end of the mortgage term.
Sadly, things have not always worked out that way. Many people who were sold interest only mortgages in the 1980’s and 90’s are now rapidly approaching the end of their mortgage term without any savings in place or a plan for how they will pay off the lump sum.
Research by Citizen’s Advice suggests that in the region of 934,000 homeowners in the UK who are currently on an interest only mortgage have no plan in place for the final repayment. They estimate that the average shortfall for these people is £71,000, meaning many people could be facing repossession when their interest only deal comes to an end.
Financial Changes Have Brought New Challenges
It is estimated that there are currently 3.3 million people in the UK who are in an interest only mortgage situation. An investigation by the Financial Conduct Authority showed that around 600,000 of these mortgages would be maturing by 2020, with many more maturing in stages over the coming decade. While the owners of such mortgages were aware that this was the situation, certain changes to lending rules and economic shifts in general, have caused them problems with repayment. For example:
Recession: Interest rates have dropped drastically. Those paying into a savings or investment plan may be getting back significantly less than they had planned, causing a major shortfall in funds.
No extension of mortgage: Lenders rules and criteria have changed drastically since the crash of 2008, and now it is very hard to get an interest only mortgage. The chances of extending a mortgage agreement on these terms is slim.
No remortgage: Borrowers may have planned to switch to a repayment mortgage when the interest only period expired, but this might not be as simple as they thought. With tighter lending criteria and many of these homeowners over the age of 50, they are more likely to be turned down for a mortgage.
Not easy to downsize: Some homeowners may have planned to sell up and use any equity in the property to buy a smaller place. However, this can be tricky, as house prices may not have grown in the way the owners had forecast, and they may have little or no equity remaining.
While the economic situation over the past few years has certainly made it awkward for some of the older interest only mortgages, it’s not all bad news. There are ways to ensure you have a smoother ride come the end of the agreed period, but it’s important to make those changes now rather than wait until things get financially strained.
How You Can Pay Off Your Mortgage Faster
If you’re on an interest only mortgage, there are a few things you should do right now, or at least start making plans for, to ensure you aren’t caught out at the end of your mortgage term.
Switch part of your mortgage to repayment: While still paying towards the interest only deal on one part of your mortgage, switch a chunk over to repayment to start reducing your debt. You’ll still need to figure out where to get the lump sum from at the end of the interest only term, but you should be able to whittle things down a bit in the meantime.
Pay more into savings: If you’ve got spare income, increase the amount you are saving each month by as much as you’re comfortable with. Be aware that the value of investments can fall as well as rise, so take good financial advice on this from a professional.
Reduce the mortgage early: If you have savings already, talk to your lender about paying off a slice of your mortgage right now, which might enable you to afford a repayment mortgage sooner rather than later.
Switch to a full repayment mortgage: If you can afford to, switching to a full repayment mortgage now while you are still credit worthy is a great way to stave off the risk of losing your home later on. The longer you leave things, the closer to retirement you get, and the riskier the prospect of lending to you will be.
Plan to use your pension: If you have a good company or private pension that you’ve been paying into for some time, find out if you’re expecting a lump sum payment and how much this will actually be. Sometimes this can be as much as 25% of your pension, which could easily be enough to pay off your mortgage. However, do make sure it’s not going to leave you ‘house rich and cash poor’ in your retired years.
Whatever your plan, make sure you do have one. There is no obligation for your lender to do anything to help you at the end of the interest only term, and they are quite within their rights to demand you either pay up, sell up or get out. Put a plan in place now, and avoid risking your home and your future later down the line.
If you would like to discuss your options or have applied for a repayment mortgage and been turned down, please contact me. There are ways to pay off your interest only mortgage without losing your house and I would be happy to talk through these with you. Call me on 01252 759 233 or email richard@thesurreymortgagebroker.co.uk
