Why You Could Be at Risk With an Interest-Only Mortgage
In the next year or so, thousands of interest-only mortgages are due to mature, leaving many homeowners financially at risk.
According to the Financial Conduct Authority (FCA),
The interest-only period will run out for around 81,400 mortgages in 2019 – worth roughly £9.2 billion.
In 2020, another 82,000 mortgages will also mature, worth around £9.7 billion.
The main problems for these homeowners are that they might have to:
Repay their loan in full.
Take out another mortgage, which is likely to come with higher monthly payments.
Have their home repossessed.
Many of these homeowners are over 60, and unfortunately, it may be difficult for them to get another mortgage as there aren’t so many options available for borrowing. This means they could still be paying off their mortgage even into their retirement.
Banks are also worried that borrowers might not have a plan ready for paying off their loan, so many are already trying to reach out and prepare everyone in advance.
Interest Only Mortgages and Endowment Policies
You might not be so familiar with interest-only mortgages, as they were only really popular in the 1990s and are not available today (interest-only lending stopped in 2012). They enabled people to just pay back the interest on a mortgage, meaning that their monthly payments were low.
Back then, many interest-only mortgages came with an endowment policy. The purpose of this policy was to pay back the remaining cost when the mortgage matured.
While this all sounded wonderful at the time, endowment policies started performing badly. Despite this, lenders carried on selling these types of mortgages and policies, even though they knew full well that the people borrowing didn’t have any financial plan to pay it all back.
Over a million people do not have a repayment scheme connected to their mortgage, and around half a million haven’t even thought about how they’re planning on paying the money back.
This is mainly going to affect people who are getting close to retirement, who may have a higher income, assets and more time to help pay off the money. The next time that mortgages are set to mature is in 2027 and 2028, which is likely to impact those who are older and potentially less well-off, which is incredibly worrying.
Advice for Borrowers
Firstly, if you have an interest-only mortgage, you need to check when the policy is going to reach the end of its term. Then, try to have a plan ready in advance to be prepared and so that you’ll know what to do when the mortgage matures.
It’s crucial that you do this, as the lenders reserve the right to repossess your home if the loan isn’t repaid.
You also need to check whether or not you were mis-sold an endowment policy – you may be able to reclaim it.
Potential options for you:
Change to a repayment mortgage if you can – expect to pay higher monthly payments though.
Extend your mortgage – this will give you more time to find the money to pay it off and possibly increase the value of your home.
Pay more than the interest – if you can do this, it will help to decrease the capital owed, but check with the lender as you may not be able to do this.
Retirement interest-only deals – some lenders may offer this, which will maintain similar repayments until the owner of the home either goes into care or passes away.
Downsize to a smaller and cheaper property.
If you feel you might have been mis-sold a mortgage or endowment policy, you should check this straight away – you might be able to reclaim. You could also try complaining to your lender who offered you the deal in the first place.
By complaining, you unfortunately won’t be able to eradicate the debt you owe, but you may be able to get help to repay it or get more time for getting the capital to pay it off.
DON'T LEAVE IT TOO LATE - make sure you check your living circumstances now!