Ever heard the phrase ‘Your home is at risk if you don’t keep up the repayments on your mortgage’. Sounds pretty familiar, right? But the risk of losing their home is creeping much closer for hundreds of thousands of people on an interest-only mortgage.
They are, quite simply, teetering on the edge of an interest-only cliff.
Time to pay up
A recent statistic from the Financial Conduct Authority (FCA) revealed there are 1.67 million full interest-only and part capital repayment mortgage accounts outstanding in the UK. Many of these are held by people in their 60s and approaching retirement.
They have an interest-only mortgage on their beloved home and no way of paying off the debt before they retire. The concern is that a significant number of these people won’t be able to repay it and, you guessed it, risk losing their homes.
But instead of contacting their lender or speaking to a financial adviser to see what their options are as their term nears the end, the FCA says many borrowers are ignoring the problem.
This could lead to large numbers of people losing their homes as lenders are forced to take possession of properties in order to settle the debt.
How has this happened?
Interest-only mortgages were a popular choice for borrowers 15 to 20 years ago. These types of mortgages enable you to pay off the interest each month but make no capital repayments.
Borrowers were expected to set up investment plans to repay the debt at the end of the term and quite often endowment policies were used. In many cases the endowments underperformed, leaving borrowers with a shortfall.
Other borrowers never set up anything at all, in the hope that rising house prices would enable them to build up sufficient equity to repay the mortgage.
What are the options?
There are a range of possible solutions to help address this problem. The most important thing is to avoid burying your head in the sand as it’s not going to go away without any action. Some of the ways to address this include:
Paying off the debt in full
- Using savings, investments and sometime pensions can help pay off the mortgage before the term expires.
- This is great if you have the means to do this but many facing this issue don’t have the savings or investments to achieve this.
Extend your mortgage term and make overpayments
- Lenders will sometimes allow you to extend the mortgage term to allow you more time to pay off the debt.
- However lenders will only do this if they can be certain that you will repay the loan. Many lenders also don’t allow borrowing into retirement.
Switch to a repayment mortgage
- If there is enough time, changing to a capital repayment mortgage will ensure that the debt is repaid in full.
- The monthly repayment will go up which can sometimes be unaffordable for borrowers.
Sell your property and downsize
- For properties that have gone up in value there could be potential to sell up and use the difference between the selling price and loan to purchase an alternative home.
- However, many homeowners don’t want to move or would not have enough remaining equity to buy anything half decent if they did.
Retirement interest-only mortgages
- One new option to consider is a retirement interest-only mortgage. Lenders offer these to help older homeowners trapped in interest-only deals.
- These are similar to regular interest-only mortgages except there is no end term as the loan is repaid either when the property is sold, on death or going into care.
- Lifetime mortgages or equity release are a popular method to address interest-only debts. These will allow homeowners to remain in their home and repay the loan either when they sell the property, move to a permanent care home or on death.
- There are different types of equity release available which give you the choice to maintain the interest payments, make overpayments or let the interest roll up. This can provide borrowers with flexibility if they’re gong to struggle to make repayments during retirement.
How we can help
Deciding on which solution is best will depend on individual circumstances. It’s therefore important to talk to an expert to guide you through the options and help identify the best way forward.
If you are a homeowner facing an interest-only cliff edge please contact us.