On 2 May 2013, the FCA published findings showing that some borrowers with an interest-only mortgage may not be able to fully repay their loan at the end of the loan period. But there are steps you can take to check your repayment plan is on track and, if it isn’t, to see what options are available to repay all of your loan when your interest-only mortgage ends.
Repayment and interest-only mortgages
Most homeowners have a repayment mortgage, where monthly payments go toward paying the interest on the loan and repaying the amount borrowed, which is known as the ‘capital’. If you keep up with your monthly payments on a repayment mortgage you will have repaid all of the loan when your mortgage ends. With an interest-only mortgage all of your monthly payment only goes toward paying the interest. This lowers the amount you have to pay each month but you will need a separate plan to repay the capital at the end of the loan period.
Can you repay your mortgage at the end of the term?
Many borrowers with an interest-only mortgage should be able to fully repay their loan when it is due for repayment. However, the FCA found that some borrowers – including some with an interest-only mortgage due to be repaid before 2020 – need to act now to make sure they will be able to repay the loan.
The Money Advice Service (www.moneyadviceservice.org.uk/en) has a guide on how to calculate how much you have to save each month to fully repay the capital on your interest-only mortgage. This can be used to gauge how much you should save or overpay by, by comparing the amount you are paying on interest-only with the full repayment amount. Your lender will also be contacting you over the coming months to prompt you to checking your repayment is on track and you have considered all options available to you.
If you need help or advice on your interest-only mortgage, and want to look at repayment plans, or transferring to a repayment loan give Choice a call on 0800 612 8099.