Interest Only Mortgages – How Do You Plan To Repay?Written on August 17, 2016 by Kirk Rice LLP
The industry body, the Council of Mortgage Lenders, recently reported that there are around 1 million people with interest-only mortgages in the UK, and banks and building societies are contacting these customers as a matter of urgency to find out what plans they have in place to repay the capital sum.
Interest-only mortgage holders only pay the interest on the loan each month and don’t repay any of the capital. At the end of the mortgage term, they still have to find the money to pay back the amount they originally borrowed. In many cases this can be a sizeable sum.
This type of mortgage was often taken out by those with variable incomes who aimed to pay off capital along the way, or landlords planning to sell their property at the end of the term to repay the loan. However the regulators are concerned that some interest-only mortgage holders aren’t fully aware of the position they are in and haven’t made adequate plans for repayment when the time comes. If the money can’t be found, then the homeowner faces a stark choice – to sell their property to repay the outstanding loan, or have their property repossessed.
Putting Plans In Place Now
If you have spare cash available, you can make a capital repayment to reduce the amount of mortgage outstanding. Those nearing retirement with a pension pot can consider using their 25% tax-free lump sum to pay down the debt. Consideration could be given to switching to a repayment mortgage instead. Whilst it would mean an increase in monthly payments, you would start paying off capital.
Selling your home could release enough cash to repay your mortgage. This can be an acceptable solution if the right alternative accommodation can be found. However, if you’d rather stay in your current home, then Equity Release might be a viable alternative often involving a lifetime mortgage where you take out a loan secured on your property which is repaid when you die or go into long-term care.
It is important to take professional advice if you are affected by this issue.
Think carefully before securing debts against your home. Your home may be repossessed if you do not keep up the repayments on your mortgage.
Any reader interested in discussing this topic further can telephone Peter Sharratt on 01344 875000 or email peter.sharratt@kirkrice.co.uk.
If you would like to receive Money Matters electronically, simply email info@kirkrice.co.uk stating Money Matters Article in the subject heading and we will add you to our distribution list.
Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made.
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