How to pay off an Interest only Mortgage before you Retire

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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

6 Reasons a Mortgage Application is Declined and What to do

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So you’re buying a house. You’ve found your dream property. It’s in the right location, it’s the right type of house and it’s within your budget… happy days. But.

Despite your bank being very confident you would be approved for a mortgage, you’ve been declined. Despite keeping your credit record squeaky clean for years and years, some pen pusher has said ‘no’. Despite working hard to save for a deposit and spending months looking for the right property, your dream home is slipping out of your hands.

Sometimes life doesn’t seem fair, but you don’t have to take this lying down. Here’s a list of some of the most common reasons a mortgage is turned down, and what you can do about it:

  1. There’s a problem with your credit file

If you have a poor credit history, it’s a good idea to improve your credit rating before you even start to apply for mortgages. However, sometimes you can have a perfect credit record, but a simple mistake on your file could make you look like a risky borrower. Contact the credit reference agencies (Equifax, CallCredit and Experian) and get a copy of your file to make sure everything is as you expected.

2. You’re not on the electoral roll

Lenders like to confirm that you are who you say you are, and that you live where you say you live. For this, most will check your application details against the electoral roll. This is an easy one to overlook, and if you find you are not on the register, it’s an easy one to resolve too. Simply contact your local council to be added or do it yourself at www.aboutmyvote.co.uk

3. You have debt, unsecured loans or payday loans

Borrowing is not seen as a bad thing per se. But borrowing over your means is. If you’ve taken loans, overdrafts or other credit, make sure you’ve paid back as much as you can before searching for a mortgage. Payday loans are the worst, as these are seen as emergency credit that is taken out by people who can’t cope. Any payday loan since 2011 will show up on your file, even if you paid it off on time, so avoid taking these at all costs.

4. Your deposit is too small

You can get a mortgage with as little as 5% deposit but many lenders are currently asking for more. This is especially true if you don’t score highly in other areas of a lender’s criteria, they may still be prepared to lend but will want a larger deposit. Try to boost your savings as much as possible before entering into the application process. The larger your deposit, the greater your chance of being accepted and the more preferential the rate you’re offered will be.

5. You’re retiring during the mortgage term

New mortgage affordability criteria which came in during 2014 have seen many more people being turned down for mortgages despite having good salaries and clean credit records. If you or your partner are due to retire during the mortgage term, your lender may look unfavourably on your application. With housing so expensive, some borrowers are seeking out 30 year mortgages, which could see you being turned down as young as 40 years old. If this is the case, see if you can increase your monthly payment budget and reduce the mortgage term so you are not retiring during the loan period.

6. Application errors

Nobody is perfect, not even your lender, and mistakes can sometimes happen that were simply a human error. At some point, the information from your application form was entered into a computer database, and a simple typo in this situation could see you turned down. If the refusal is really unexpected, schedule an interview with the lender to discuss your application.

7. You just don’t fit their criteria

Some lenders have a specific demographic that they like to lend to, and if you don’t fit the bill, then you could be turned down. If you think this has happened, try approaching an independent mortgage advisor for help, as they will have a better idea of which lenders are likely to accept your application.

Whatever the reason you’ve been turned down, don’t let it dishearten you. There are things you can do to make your application more attractive to another lender. Get in touch if you’re in this situation and want some impartial advice. I’m always happy to chat through your options so call me on 01252 759 233 or email richard@thesurreymortgagebroker.co.uk