20/04/17Are you one of the thousands with a time-bomb mortgage?
3.3 million mortgage holders in total have interest-only products, and 40,000 of these will reach maturity each year between 2017 and 2032.
It is estimated that 10,000 of these have either a shortfall, or no way of repaying the capital, and a YouGov poll conducted in 2015 suggested that:
- 51% of people with an interest-only mortgage have no linked repayment vehicle, such as an endowment or ISA (Individual Savings Account)
- 28% have no strategy as to how they will repay their mortgage
- 13% have not even thought about how they will repay the capital
600,000 interest-only mortgages are set to reach maturity over the next 15 years, and many are referring to them as ‘ticking time-bombs’. If you are one of the many that doesn’t have a strategy in place, what exactly are your options?
1. Starting to pay off the capital
Lenders will allow some, or all, of the capital, to be repaid before the mortgage reaches maturity, which can reduce the final figure that needs to be settled.
Common options include:
- Repaying ad-hoc amounts. This literally means paying the capital back ‘as and when’ you can, which can ease the burden significantly over time
- Switching your mortgage to a capital repayment basis. Doing this will increase your monthly repayments, but will guarantee that the loan is repaid at the end of the term
Before repaying any capital from your mortgage you should check that you will not incur early repayment charges by doing so and that no other additional charges will be made.
2. Saving or investing
Putting money aside to pay off your mortgage is an alternative to repaying the capital.
There are plenty of options available to savers and investors, including:
- Cash ISAs
- Stocks & Shares ISAs
- Regular savings accounts
- OIECs & Unit Trusts
Each carry different risks. For example, inflation may erode the value of your savings, whilst the value of investments, particularly those linked to the stock market, can rise and fall.
The key is to plan.
Take advice to understand whether you are better to accumulate money in savings or investments, to ultimately repay your mortgage, or if you should repay amounts from the capital on a regimented or ad hoc basis.
Depending on your personal circumstances, downsizing to a smaller property could be a viable option. This would mean selling your home, repaying the mortgage and then using any leftover money to buy a smaller property.
For couples with empty nests and spare bedrooms, this could provide a solution to an interest-only mortgage whilst also reducing:
- Energy bills
- Council tax
- General maintenance and cleaning
However, downsizing can also come with downsides, with costs to factor in such as:
- Estate agent fees
- Stamp duty
- Legal costs
Rising house prices can also mean that a smaller house isn’t always significantly cheaper, so careful consideration and a thorough crunching of the numbers is required.
4. Equity Release
Equity release is a type of loan that allows homeowners to receive a lump sum of money based on the value of their property. This could then be used to repay the existing mortgage.
Unlike a traditional mortgage, interest is not paid on a monthly basis, but added to the outstanding debt, which is then repaid on the future sale of the property, perhaps when the homeowner dies, or goes into care.
This money could then be used to repay the existing mortgage. It is then subsequently repaid when the homeowner either dies or goes into care, and the property is sold. There are two common types of equity release schemes available:
Whilst equity release allows an individual to stay in their home, there can be significant disadvantages so independent advice should always be taken.
Whatever you do, don’t be an ostrich
There are several options available if your mortgage is currently arranged on an interest only basis, and burying your head in the sand definitely isn’t one of them.
Many people are referring to them as ‘ticking time-bombs’, and it is easy to see why. If you don’t diffuse your interest-only mortgage with a solid strategy, you won’t like what happens when it eventually goes off.
If you have an interest only mortgage and would like to understand more about your options please do not hesitate to get in touch with us.
Please note: Your home may be repossessed if you do not keep up repayments on your mortgage.