Interest only mortgages have become a hot topic over the last few weeks.
This month began with research published by the Financial Conduct Authority (FCA) which has confirmed fears that homeowners with interest-only mortgages have become too complacent about the repayment of their borrowed capital.
The FCAs findings revealed that over the next 30 years the time will run out for 2.6 million mortgages of this kind meaning that repayment will be demanded. As much as 10% of these mortgages are not supported by a repayment strategy; these homeowners put themselves at great risk of repossession, or further monthly payments to endure as far as mid-retirement.
An interest only mortgage requires borrowers to pay only the interest each month until the end of the home loan term, at which point they are required to pay the borrowed capital.
As regulators, the FCA together with the Council of Mortgage Lenders (CML) and the Building Societies Association (BSA) are now ensuring that mortgage lenders contact their interest-only customers to stress the importance of developing a suitable repayment plan.
It is essential that interest only customers devise a repayment plan urgently. This is especially recommended for borrowers who have to repay the mortgage by the year 2020. Several hundred thousand of these homeowners are likely to end up with a shortfall, of which a third are believed to be an unsettled balance of £50,000.
At Choice Financial Solutions we have helped a range of clients each at different stages of their ‘mortgage life’, to establish a suitable repayment vehicle; however, simply clarifying how they are going to repay their mortgage isn’t enough. It is just as important that this strategy is reviewed regularly to make sure that it is still the best and most feasible repayment option.
One of our most recent clients had been on interest only since first taking out a mortgage. As they had no significant savings or endowments, the best option was to get them on a repayment mortgage instead. Changing from paying only the interest to a repayment mortgage can cause a substantial increase in monthly payments, but we helped them to find a more manageable long-term agreement which will absorb this increase.
Something we often hear when clients seek help with interest-only mortgages about to come to the end of their term is that, although they are aware that it isn’t actually getting paid off, time just ran away with them and they never got around to properly addressing potential solutions. Other homeowners, who still have many years of paying interest to go, assume that they will be in a position to pay off their mortgage when the time arrives, from inheritance and “down sizing”. Having a plan in place ready for the end of the loan is a safer option just in case these assumptions don’t become a reality.
Tackling a mortgage shortfall can be a daunting prospect, but the first big step is to actually acknowledge that you need to identify exactly how the mortgage will be paid off. Once this has been addressed, you should gain help and advice from a whole of market broker who will provide you with options and access to all of the mortgage market.
Get in touch and we can begin exploring the viable repayment options available to you.