Nearly two million interest-only mortgage holders are putting their financial future at risk as they have no way to repay it. Are you one of them?
A report from the Financial Conduct Authority (FCA), into how mortgage lenders are engaging with borrowers who have an interest-only mortgage, has shown that 1.67 million people are at risk of financial difficulties when the time comes to repay their mortgage in full. They fall into two groups:
The first are those who had an endowment to repay their mortgage: this was a form of savings which would accrue over the term of the mortgage, with the aim of accruing enough to make the final payment. However, many chose to cash them in and often didn’t make alternative arrangements to repay.
Secondly, those who purchased their interest-only mortgages in the early 2000s, when they offered an affordable way to get onto the housing ladder, are now still unable to make such a large payment.
Either way, the key issues persists that 1.67 million people have a mortgage that they have no way of repaying.
What are the options?
With 10 to 15 years left to make sure that you have enough money to repay your mortgage, you have plenty of time to think about your options. What you shouldn’t do right now, is put it off until later. Financial hurdles are best dealt with sooner rather than later. The more time you give yourself to find a solution, the easier it will be to overcome.
Some options to consider include:
Changing to a capital repayment mortgage: Talking to your bank, building society or mortgage adviser will give you a better insight into the options available to you. One option is to switch to a capital repayment mortgage, which guarantees the debt is repaid.
Using assets and savings to repay: Consider using other savings and investments to repay your mortgage. However, you need to understand how using your ISAs, savings and investments will impact your financial future. For example, will paying off the mortgage with money you have saved, or invested, mean that you need to delay retirement?
Pensions: Since the introduction of pension freedoms in 2015, you have more flexible access to the money you have in pensions. Therefore, using money you have in pensions to repay a mortgage is an option. However, doing so creates further financial difficulties. After all, by using your pension to pay your mortgage off, it won’t be there to provide an income in retirement. Furthermore, taking more than the 25% tax free lump sum may trigger an unwelcome tax charge.
Downsizing: Selling your current property and moving into a smaller and more manageable home is an option many people consider in later life. Ideally, you will be able use the capital from selling your current home to repay your mortgage and buy a more comfortable property.
Equity Release: Switching your interest-only mortgage to an Equity Release Mortgage (also sometimes known as a Lifetime Mortgage) is an option. With this route, interest will be added to your outstanding debt, with the entire balance repaid when you sell the house or die. This is usually a last resort, as it will eat into the equity available in your home, reducing the amount available to leave to loved ones when you die.
What should you do now?
Your next steps will be the first you take toward feeling more confident about your financial security and ability to repay your interest-only mortgage. They include:
Talking to your lender: Ask what the options are and take the time to discuss how each will suit your lifestyle and financial circumstances. You do not have to make any decisions at this point, but it is advisable to gather as much information as possible and educate yourself on the possibilities.
Seeking financial advice: An independent financial adviser will be able to offer solutions and products which suit your financial needs and aspirations, as well as helping you to develop a plan which will put you on the right track financially.
Planning: Using the advice given by an adviser, you can begin to plan how you will generate enough capital to repay your interest-only mortgage.
Committing: It might seem self-explanatory, but sticking to your plan is the only way to make sure that you have enough money available when the time comes to repay your mortgage. Occasional slip-ups are fine, but make sure you get back on track as quickly as possible.
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