Interest-Only Mortgage Expiry
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Interest Only Mortgage ExpiringOur MD Daniel Condren talks about Interest Only Mortgage Expiring. Listen below
Interest Only Mortgage Expiring
Daniel Condren talks all about interest only mortgages expiring.
What happens when my interest only mortgage comes to an end?
As with any mortgage, you’ve got to look at what’s available. Just because your interest only mortgage has come to an end with your lender, it doesn’t mean that there aren’t other options for you.
The lending market in the UK has got far better. There are more lenders, more options and more choices. So if you do have an interest only mortgage that is coming to an end, don’t panic. Speak to a broker to see what they can do.
What are my options if I can’t repay an interest only mortgage?
If you’re not paying the interest, that’s a problem. It means you’re going to go into what we call arrears. You could default on that mortgage which will put your home at risk. It does happen, especially in recent years with the pandemic causing job losses and reduced income.
But the worst thing you can do is ignore it. My advice is to seek guidance. Speak to your bank or a broker to understand your options and what you can do.
Is interest only a good idea?
Interest only is a great strategy for some customers. If you’re not repaying the capital it is advisable to look at a repayment plan so that your mortgage is going to come down over time. In the 1980s and 1990s interest only was a very common thing. Most people took out an endowment alongside it, which was an investment plan designed so that at maturity, you would have enough money to repay your mortgage.
But of course there was a big financial crash in 2008 that unstabilized endowments, stocks and shares, and investments didn’t perform as well as expected to repay those mortgages. Since then the industry became regulated by the FCA and most mortgages these days are on a repayment basis. It means that over the term of your mortgage, the debt will come down by itself.
Interest only options are still available on a residential basis. It’s not as easy as it used to be with lenders, but if you’ve got a big enough deposit or equity that will help. Interest only will make the mortgage much cheaper on a monthly basis but be ready, because any adviser will ask you about your plans to repay the debt. That could be a savings plan, stocks and shares or other assets. The lender would definitely want you to have a strong enough income to be able to overpay, so your income is always questioned.
Typically the requirement might be to earn over £75,000 a year – a good enough income to stay on interest only while making overpayments. The aim is to have enough equity to be able to downsize at the end of the mortgage term. What lenders don’t want is for you to reach 25 years, retire and need to sell your house to repay the debt. It feels ethically wrong, when you have years of memories in that home.
Can the lender repossess my home if I can’t pay?
In a worst case scenario, yes. We have to warn you of that and the standard line you’ll see everywhere with mortgages is ‘your home may be repossessed if you don’t keep up on your repayments’.
Really, you’ve made an agreement to pay the interest on a mortgage and you don’t keep up with that repayment plan, you haven’t lived up to your agreement. The bank will want the asset back to recover their money.
Having said that, lenders have a duty of care to look after you as their customer. They will give you time to get on track or put you on a payment plan. They’re not just going to repossess your home straight away. They will try to find a solution that works for you. But if you refuse to repay the debt then ultimately, you can expect to lose the home.
How long can you stay on an interest only mortgage?
If your income is strong enough and your equity is there you could stay on a mortgage for decades. There are lenders that will let you borrow until the age of ninety or even death in certain circumstances.
As long as you’re keeping up to your agreement, the lending market is definitely getting better for later life lending. A typical mortgage term is 30 or 35 years as long as you’re still working and it’s affordable.
Can I get an interest only mortgage at age 60?
As long as your plans are to repay the mortgage through savings, overpayments or another means, lenders will usually be fine with that. The minimum term would be five years with most lenders. At 60 you could easily do a five year term, or push it to age 70, or even 75 with some specialist lenders. Certain building societies will lend up to the age of 80 or 90.
Can you extend the term of an interest only mortgage?
You have to go through an assessment with the lender to extend it, but working with a broker like myself makes that easy.
Years ago previous generations would just have a relationship with one bank, and it was all about whether they said yes or no. It’s completely different in today’s market. If one lender says no, there may be another that will agree. There’s so many more choices and options available now for customers, which is fantastic.
So yes, you can extend the term, subject to your current lender’s rules. If not, seek out the advice of a broker to see whether you can move to a new lender.
Can you claim back on an interest only mortgage?
We live in a claim culture now where you can often get compensation for mis-selling. But since the FCA revamped the regulation and brought in more customer protection, it’s unlikely that you would get an interest only mortgage and not understand that you’re not reducing the size of the debt.
Years ago, before the regulation came in, you didn’t get the same level of documentation you expect now. You could probably get an interest only mortgage and not realise that you’re not repaying the debt.
In terms of whether you can claim that back, you would need to somehow prove you were given bad advice. In today’s world we have to do so much reporting, justification and documentation it would be very hard to prove you weren’t aware. But if you have an interest-only mortgage that was set up twenty years ago, seek advice. You could go back to the original broker if they’re available, if not go back to the bank.
What are the advantages and disadvantages of an interest only mortgage?
The advantage of an interest only mortgage is that the payments are so much lower than a repayment mortgage. Interest rates are very low right now, although they were slightly increased by the Bank of England recently.
With interest only you’re not repaying the capital – the money you needed to buy the property. You’re just servicing the interest. So if interest rates are low the monthly payment is so much lower and you have more of your income left each month.
The disadvantage is that you’re not paying back any of the debt. So when it comes to the end of your term, you’re going to be left with a very big sum of money to repay. You’ve got to think about how you will pay it back when you’re, say, 55 and your income has reduced or you have retired.
With interest only, the younger you are and the more you can focus on the future and the plan to repay it, the better. We always talk out the plan with every customer to make sure they understand how important it is to have a way to repay that money.
Interest only can make financial sense if you plan it right. So if interest rates are 2% and you’ve got money invested, it makes sense to put all your money into an investment because that’s going to grow and one day pay off the debt. Savings right now are not the best way to grow your money.
But if you’ve got stocks and shares in a tax-free ISA it may be beneficial to put your savings in that over the next twenty years to repay the mortgage. It’s like your pension – a long-term investment plan.
What other advice do you have on interest only mortgages?
If you do go for interest only, my main advice is not to forget about it. Keep reviewing it. Look at it every two to five years – and a good broker will stay on that journey with you. Overpay the mortgage as much as you can, as it will benefit you in the end. The equity in the property will compound and you’ll have a bigger asset.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE
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