Sara Benwell – The Sun
HUNDREDS of thousands of interest-only mortgages are due to come to an end over the next two years, leaving people to pay off their loans in full.
The Financial Conduct Authority (FCA), along with Experian, has calculated that approximately 81,400 of these deals will come to an end this year, with a further 82,100 ending in 2019.
The total value of the mortgages coming to an end in the next twelve months is £9.2billion, meaning homeowners owe over £113,000 each on average.
Anyone whose mortgage comes to an end will need to come up with the money or negotiate another deal with their provider – otherwise their home could be repossessed.
If your agreement is ending soon and you don’t have the savings to pay it all off at once, you need to come up with a plan – fast.
Back in 2015, lenders were told they had to contact any customers whose loans expired before 2020, but the FCA found that lots of people have been burying their heads in the sand.
If you’ve got an interest-only mortgage – here are your options:
1) Repay the loan in full immediately
Repaying your debts in full as soon as your interest-only mortgage expires is what you’re supposed to do.
The expectation is that you will use savings, investments or other cash to clear your debts.
If you have enough money saved to cover the amount you owe, you can pay off your loan when your deal expires and own your house outright.
Another option if your house has gone up in value substantially, is to sell it and use the difference between the loan and what you sell for to put down a deposit on a new home.
If prices haven’t risen by as much as you’d hoped, you may want to look into downsizing to make up some of the cash shortfall.
2) Extend your mortgage
If you have savings, investments or an endowment that is only just falling short of the capital you need to repay, you might be able to extend your interest-only mortgage.
Your lender will only do this if it is certain you will be able to repay the whole sum.
Older homeowners may find their banks are less willing to offer this as many have rules that restrict lending into retirement.
If you’ve got several years left on your mortgage, it makes sense to switch to a repayment mortgage if you can.
Your monthly repayments will go up, but you’ll be reducing the amount you have to pay at the end.
If the monthly amount is more than you can afford, you can see if you can extend the terms to spread the payments over a longer time period, or if your provider will let you go part interest-only part-repayment for a while.
Even if you can’t switch to a repayment mortgage, some lenders might let you overpay to start paying down debt – usually the equivalent of 10 per cent each year.
Check your policies carefully to avoid fees.
If you want to switch to another interest-only deal, be careful.
Lenders now need to assess your repayment plan, including affordability and income checks.
This may make it harder for you to get a new deal.
Older owners should be wary too. Lots of banks have rules about lending money to retirees so you might struggle to get a plan that extends beyond your retirement date.
4) Equity-release or retirement interest-only deals
One new option you could consider is a retirement interest-only deal.
Lenders offer these mortgages to help older homeowners trapped in interest-only deals.
The idea is that you pay interest on your house as long as you live there, but then have to repay the loan when you sell up, go into care or die.
The downside is that you won’t be able to pass on property to your children as it will be used to pay off your debts.
Another option may be to use equity release to release some of the value of your home to pay off your debts.
With a lifetime mortgage, which is one of the most common forms of equity release, you can release up to 50 per cent of the value of your home.
There are different sorts available, including drawdown options, which release cash in chunks, and protected plans that guarantee some inheritance for your family.
Whether you will qualify depends on your loan-to-value (LTV) rate.
Check that your plan has a “no negative equity” policy to make sure you won’t end up with debts larger than the value of your house.
Before considering equity release, it’s important to meet with a financial adviser.
Be warned that you may substantially reduce the amount of money you can leave to your family.