Interest Only Mortgage & Debt Worries
What does FCA Suggest:
The “FCA” commented that lenders are writing to their customers as their mortgages approach maturity but that a willingness of customers to engage with them to discuss affordable options for repayment of capital is still quite low. This may be because of the real fear that it could lead to the borrower losing their home (or increased household outgoings i.e. monthly cost of a repayment mortgage). The FCA estimates that there are 1.67 million full interest-only and part capital repayment mortgage accounts outstanding in the UK; this may point to many families in the UK being unable to repay the borrowing at the end of the mortgage term. However, for these families, the time will come when they have no option other than to take steps to address the issue.
Are you are on an “interest-only mortgage”, What can you do?
Here, are things to consider and steps you can take to identify an interest-only shortfall and address the problem:
- Switch to a repayment mortgage and start to pay down some of the debt. This will cause your monthly repayments to rise, but with interest rates at historically low levels in the year 2019 is a good time to remortgage and lock in a low rate.
- Pay from your existing savings/cash towards your mortgage to bring your mortgage balance down. Save funds to fill the gap between capital outstanding and zero balance. The earlier you start, the better.
- If your lender permits, you could extend the term of your loan to give you more time to build up funds to pay off the debt.
- Switch to a half-and-half mortgage. As the name suggests, this is a mortgage where half is on a repayment basis and the rest is interest-only. This allows borrowers to pay down the debt, but with less of a financial burden than moving to a full repayment deal. A mortgage broker will be able to offer advice on which lenders can help.
- Make overpayments as you are allowed to pay up to 10 % of your mortgage balance. Even if you’re unable to switch your loan, in most instances you will be able to make overpayments on your current interest-only mortgage and reduce the debt.
- Consider equity release. For older borrowers it can be especially difficult to get a new loan with a high street lender, meaning many are turning to equity release or lifetime mortgages. These mortgages are designed for those in later life as the interest and capital are only paid off when the borrower dies or leaves the property permanently, for example for a move into long-term care.
- If you are on a relatively high rate mortgage, check if you can remortgage given rates remain quite low. You may not pay that much more on repayment than on an interest-only if you move from a high rate to a cheaper one.
- If your after-tax rate on savings is lower than your mortgage rate, you may want to repay your mortgage with savings. Check for penalties for overpaying first. Savings rates are normally lower than mortgage interest.
- You could try to go part interest-only, part repayment, if you have the cash, pay it towards the mortgage balance as you are allowed to pay a certain percent of your mortgage balance without a penalty. Or you could switch to a repayment mortgage if you have plenty of spare funds each month.
- If you’re at risk of losing your home now, two Government schemes could help: Support for Mortgage Interest, and, if you’re facing repossession, the Mortgage Rescue scheme.
- If your chosen plan is to sell your home, even if the value is larger than the mortgage, you need some legroom in case the value drops.
- If you plan to sell, where will you live? Make sure you consider that. If you downsize your home, will it be big enough?
- If you have an endowment, sadly, misselling cases are, by and large, no longer possible because the time limit has passed If you need help switching mortgage, try an independent mortgage broker.
- Release funds from Cash ISA, other savings, and investment and pay towards your capital mortgage balance, it may be that your savings are giving you lower returns than your monthly mortgage payment.
The FCA confirmed in its last findings in 2013 that it had not found any evidence of widespread misselling of interest-only mortgages. If you are worried about your debts, please contact us on 0203 318 0990 for a free and confidential appointment