Are you on an interest-only mortgage?
Published 24 September 2015 by Emily Bancroft
Don’t be at risk of repossession like up to a million homeowners.
If you’re on an interest-only mortgage, you probably went for this to make your payments more affordable. Interest-only mortgages have helped millions of people onto the property ladder who otherwise wouldn’t be able to buy a house – but it’s still important that they have a plan to pay off the capital at the end of the term.
However, new stats show that almost a million homeowners on interest-only mortgages are at a risk of repossession or will have to sell their house at the end of the mortgage term because they have no repayment plan in place. Let’s take a look at what the problems are, and find out how you could cope with an interest-only mortgage.
Risk of repossession
The stats from Citizens’ Advice show that there are currently 3.3 million people with interest-only mortgages in the UK. Of these, some 934,000 have no plan for how they’ll pay back the capital of the loan at the end of the interest-only period.
When you take out an interest-only mortgage now, you must have a strategy in place to clear the capital of your loan. This is known as a ‘repayment vehicle’ and can’t be something that might not come through, like a future inheritance. Your repayment vehicle could be a cash or stocks and shares ISA, a pension or another property or asset.
The rules around these types of mortgages were only tightened up three years and before that time, millions of people were able to take out interest-only mortgages without having a plan to pay it off. While this meant they were able to get on the property ladder, it also meant they’d still owe the entire amount that they borrowed after they’d only paid the interest for a number of years.
How to cope
You don’t need to panic that your home will be repossessed immediately if you’re in this situation – there are still ways you can reduce your debt. If you can afford to make bigger mortgages payments each month, you can overpay and you’ll start to reduce the amount you owe. You could also see if you can remortgage and switch to a cheap repayment deal, though you might not be able to afford these payments – depending on the term you opt for.
If you’ve got an interest-only mortgage quite recently and you’ve still got quite a while before you’ll need to start repaying the capital, there’s still time for you to find a repayment vehicle. Your mortgage lender will probably have spoken to you about this already but if they haven’t, you’re responsible for coming up with a plan to repay your mortgage. As we already mentioned, this could be a cash or stocks and shares ISA or another type of saving account, investment or a pension.
It’s best to get in touch with your mortgage lender or a financial adviser if you’re trying to decide on a repayment vehicle or if you have an endowment policy that is projected to have a shortfall and won’t cover your mortgage at the end of the term.