New research, from the Independent on Sunday newspaper, has found that more than a quarter of a million people with Interest Only mortgages could retire by the end of this decade whilst still having the debt outstanding.
Popularity of Interest Only mortgages
Interest Only mortgages were very popular in the 80’s and 90’s when they were often set up with Endowments or ISAs (Individual Savings Accounts) as repayment vehicles. However, many of these investment plans were cancelled and not replaced, leaving the borrower with no specific way of repaying their mortgage.
In the years leading up to the Credit Crunch of 2007 and 2008 many lenders granted pure Interest Only mortgages, where no specific repayment vehicle was put in place.
With 150,000 Interest Only mortgages due to come to an end each year between now and the start of the new decade it seems the problem of how to repay these loans is here to stay.
“There is a horrendous situation developing with tens, if not hundreds of thousands, of people getting to retirement age and being asked to stump up for a mortgage which may not have been sufficiently covered by an endowment investment or even capital growth,” says Stephen Lowe, the director of Just Retirement.
Interest Only mortgage solutions
Do you have an interest only mortgage with no planned way of repaying it?
Will you be retiring over the next 10 – 15 years? Perhaps you plan to retire much sooner than that.
Read on to see how to avoid being caught in ‘the interest only mortgage trap’.
Switch the mortgage onto a Capital Repayment basis
If you have a relatively significant amount of time until retirement then switching your mortgage onto a Capital Repayment basis is probably the simplest solution.
All lenders will allow you to switch from Interest Only to Capital Repayment, without changing the interest rate you pay and will generally extend the term to mirror your proposed retirement date.
Your monthly payments will obviously rise, and you will need to make sure you can afford the new payments, both now and if interest rates rise in the future; but at least this option will guarantee your mortgage is repaid by the end of the term.
The closer you are to retirement the less affordable this course of action will be.
|Interest only||£166 per month||£166 per month|
|Switched to Capital Repayment over 15 years||£374 per month||£562 per month|
|Switched to Capital Repayment over 10 years||£513 per month||£770 per month|
|Switched to Capital Repayment over 5 years||£936 per month||£1,404 per month|
The table to the right shows how payments would increase for typical mortgages, based on the Halifax’s Standard Variable Rate of 3.99%, being switched from Interest Only to Capital Repayment.
As unpalatable as it might sound, delaying your retirement might mean you could extend your mortgage term making the switch to Capital Repayment more affordable.
Most mortgage lenders will now consider lending past the State Retirement Age, although it is rare for lenders to allow a mortgage to continue past age 75.
If you do extend your mortgage you must be happy that you are able to continue to work until the end of your mortgage, extending it to an unrealistic age will only defer problems to a later date.
Selling your home might again not be the most desirable of options but it can work for some, especially if you have equity in your home.
Using the equity in your home to sell and buy a new property outright could be a solution to the problem.
Alternatively downsizing to a smaller property, but taking a smaller mortgage could be the answer to getting a loan on a Capital Repayment basis to fit a tight budget.
Using savings or investments to repay the mortgage
This might sound obvious but you would be surprised how many people we see with interest only mortgages that have savings and investments.
Whilst you might not want to use every last penny of savings to repay your mortgage debt, which would leave you exposed to a financial emergency, reducing your debt to more manageable levels by using your savings or investments could make financial sense.
Also, if you are close to retirement consider whether you could use the tax free lump sum from your pension to reduce or even clear the mortgage.
We know you might have earmarked the lump sum for something special like a new car or a holiday of a lifetime, but it just might make more financial sense to clear your mortgage, as boring as that may seem.
For older people, who have probably already retired and need to repay an Interest Only mortgage, using Equity Release could be an answer.
Equity Release means a loan is secured against a property, interest is charged but rather than being paid on a monthly basis as with a traditional mortgage it is added to the outstanding balance and then repaid when the property is sold, usually when you die.
Whilst possibly offering a solution to the ‘interest only mortgage trap’ for some, Equity Release mortgages are not suitable for everyone and can attract higher rates of interest than traditional mortgages.
Before considering this route you should take independent advice from a suitably qualified and knowledgeable IFA, who will outline all the advantages and disadvantages of this option.
Work with your existing lender
The first port of call is always your existing lender, talk to them, explain your situation and try and work out a solution to the problem.
Moving lenders should be seen as a last resort; not only will a remortgage involve additional fees it is also possible that your interest rate may increase.
Plan, the problem won’t go away!
The problem of having an Interest Only mortgage with no planned way of repaying it won’t go away overnight.
You need to plan your way out of this problem and take action; the longer you leave the harder it will be to sort out.
Talk to us and talk to lender, you will probably find a more sympathetic response than you anticipated.
Our mortgage adviser, Linda Wood, is here to help you. If you would like advice on your options call one Linda today on 0115 933 8433, alternatively enquire online or email firstname.lastname@example.org
Your property may be repossessed if you do not keep up repayments on your mortgage.
For providing mortgage advice we will charge an application fee of £299 and we may also be paid a fee from the lender, any fee paid by the lender will be disclosed to you. Alternatively we will charge an arrangement fee of 0.5% of the loan and refund to you any payment received by us from the lender.