The ticking-time-bomb: Are you one of the 1.9m people in the UK on an interest only mortgage deal?
Posted on 10 August 2017 by
It was recently reported in the national press that we are heading for a repayment crunch with repercussions for hundreds of thousands of interest only borrowers who will be unable to repay the money they owe. So how bad is the interest only 'time bomb' and what should you do if your home is one of the estimated one in ten interest only mortgage deals with no plan in place to pay off the balance?
Research commissioned by the Financial Conduct Authority suggested that of those with a mortgage due for repayment up to and including 2022, 49% would have an average shortfall of £56,200.
These interest only mortgages that are coming to maturity started in the 1990s. More often than not they were set up with investment policies such as endowments or pensions linked to the stock market. Those policies were designed to repay the capital at the end of the mortgage term. As we now know, many of these policies are worth a lot less than expected meaning many borrowers have been and will be short of the money needed to replay their full mortgage loan at the end of their deal.
Research from the Council of Mortgage Lenders found ‘a small but material number of higher risk loans’ where borrowers have little equity in their homes. This lack of equity makes them far more vulnerable. They estimate that there are 11,000 mortgage deals with two years or less left to run where the loans are worth over 75% of the value of the home.
So what can you do if you have an interest only mortgage deal?
It is essential that you review your investment plan regularly and take action if you think it is unlikely to provide sufficient funds to pay off your mortgage. If you are on an interest only deal and you have not had a review for a number of years you should seek independent guidance, advice and support from your mortgage broker right away. A good adviser can help you: -
1. Assess where you stand - By advising you to contact product provider, fund manager or financial adviser they can help asses if your investments are on track to repay your mortgage. If not, your mortgage is already underwritten so your lender will want that mortgage to remain profitable for years to come. This means we can contact your existing lender and explore if they would be willing to offer the option to overpay or switching to part repayment and part interest only and check whether you will be charged any fees. You may also be able to switch to alternative products
2. Look at alternate repayment strategies - You may have separate savings beyond your repayment plan investments. See if you can release any of this money to reduce the loan if your lender will allow.
3. Look at alternate lenders - Over the last few years the criteria for an interest only mortgage has relaxed somewhat. Some high street lenders will consider downsizing as an acceptable repayment strategy. Your current lender may not have moved with the times but maybe another lender will. Independent brokers will know which lenders may cater for your situation so permitting a remortgage to a more suitable product.
If you are on an interest only deal and would like to speak with our experts for a free review call us now on 0344 346 3672 or submit an enquiry here.
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