Interest Only Mortgages - A Ticking Time Bomb?
It may pay to consider a remortgage or equity release
INTEREST-ONLY MORTGAGES – A TICKING TIME BOMB?
Do you have an interest-only mortgage? If so take heed, Citizens Advice1 has warned that interest-only mortgages are a “ticking time bomb” for almost one million homeowners in the UK who currently have one and may have no way of repaying the capital at the end of the term.
Selecting an interest-only mortgage allows borrowers to pay only the interest on their mortgage each month, meaning the capital amount owed is unchanged. A popular selection for many borrowers because the monthly payments are usually lower when compared with other types of mortgage, such as repayment, they typically enable people to borrow a larger sum, possibly to enable them to buy their dream home.
How do you plan to repay the capital?
Certain mortgage borrowers secured an interest-only mortgage loan before the stricter rules on mortgage eligibility came into force (April 2014 and subsequent rulings), many of whom failed to give proper consideration to how they would repay the capital amount at the end of the mortgage term, leaving them faced with the prospect of repossession or having to sell their property to repay the outstanding loan.
Citizens Advice estimate that 934,0001 owners do not have a plan in place to repay the capital and urge those affected to put in place plans now.
Problems are expected to intensify in 2017 when endowment mortgages sold in the 1990s reach their peak period of maturing. Regulators have told banks and building societies to write to their customers to warn them that they could be in financial danger.
Options to consider
If you have an interest-only mortgage and have any spare cash available, you can make a capital repayment to reduce the capital amount outstanding. You could also consider switching to a repayment mortgage instead and our specialist mortgage advisors across South Wales can help find you a suitable mortgage at a promotional rate. Whilst it would mean an increase in monthly payments, you would be paying off the outstanding capital. Those borrowers with a pension pot could consider using their 25% tax-free lump sum on retirement to pay down the debt. but we would urger you to seek independent pensions advice from our Pensions Advisors Swansea first. It is important to consider your future financial needs, circumstances, affordability and objectives before making any decisions.
Selling your home could release enough cash to repay your home mortgage if you have alternative accommodation. However, if you’d rather stay in your current home, then Equity Release might be a viable alternative, often involving a lifetime mortgage where you take out a loan secured on your home which doesn’t need to be repaid until you die or go into long-term care.
It is important to take professional advice now if you are affected by this issue. Please get in touch before this ticking time bomb goes off!
1 Citizens Advice, September 2015
Think carefully before securing other debts against your home. Your home or property may be repossessed if you do not keep up repayments on your mortgage. A fee may apply for mortgage advice and, if applicable, you must ask your adviser for details before making any decision relating to a new mortgage as the actual amount will depend on your personal circumstances, but the typical amount is 1% of the loan value (on a typical amount is 1% of the loan value (on a typical £100,000 mortgage, this would be £1,000).