Borrowers of interest only mortgages within the last twenty years, have caused concerns for financial experts, as they predict a 'timebomb' emerging with many people being unable to fully repay their home loan.
According to the Financial Conduct Authority, by 2020, six million interest only mortgages will be due for repayment with around 10% of these borrowers having no repayment strategy. The main issue being that interest only mortgages only pay back the amount of interest generated on the loan; leaving the debt of the property value to be cleared off once the interest only mortgage has finished.
If this applies to you, it's not the time to panic. The key is to be prepared in by finding an appropriate repayment strategy. We detail below some tips as to what they might be....
Extend your mortgage
Your lender may consider extending the mortgage term – particularly if it increases the likelihood that the mortgage is going to be repaid in full. The success of this will depend on how long is left on your mortgage, and how old you are – some lenders aren't keen on lending money into people's retirement. If you decide to look into this option further, it's recommended to recruit a financial advisor, who will seem like an unnecessary, but is likely to save you money from making bad decisions
Again, depending on the length of your current mortgage, the lender may let you transfer across onto a regular repayment mortgage which will clear off the full amount in instalments. Your payments will increase with this of course, and you will need to assess your finances to work out how much extra you can pay.
As a consequence you may have to move to a repayment mortgage which has a higher interest rate than your current mortgage, but at least you will be making repayments towards taking ownership of the property.
A third option is to consider downsizing your residence. Obviously this will depend on your property, the area it's in, and ultimately whether it's value has increased since your originally bought it. If you're fortunate enough to have made money on the value, selling and temporarily moving to a smaller property may make enough to clear off your existing mortgage and get your firmly on the property ladder.
Talk to your bank
Due to the amount of people in this situation now, the FCA has instructed lenders to have trained staff in-branch to advise on this kind of problem. The FCA has placed an emphasis on the need for customer engagement in a friendly and sympathetic manner, in order to work with borrowers to find an affordable solution
Depending on the time left for your mortgage, you could consider simply saving money in the same way you would for a holiday or wedding. Put the money into a high-interest savings account, and you may be surprised at how much extra income is generated over the long-term
Cash in Endowments
Initial adopters of interest only mortgages would have taken an endowment policy out as a vehicle to cover repayments. Sounds great but the problem is that many of these investments have underperformed, leaving borrowers with a shortfall to make up. Depending on the state of your endowment policy, it may be worth considering cashing it in to either pay off a chunk of the mortgage straight away, or to reinvest elsewhere such as a shares based Isa.
If all else has failed, you may consider freeing up some money via 'equity release'. This can be an effective, although costly way of staying in your home. For more information see our Guide to Equity Release