Take action if you have an interest only mortgage
Wednesday 23 May, 2018
Thomas Oliver’s Hertfordshire Mortgage Broker, Vishal Gulrajani, recommends anyone with an interest only mortgage seeks mortgage advice to determine their options.
Before the 2008 recession in a period when mortgages were less heavily regulated, interest only mortgages were popular options for anyone purchasing a residential home, and more importantly they were very easy to obtain. Many individuals opted to take these mortgages with low cost endowment policies that often failed to cover the mortgage, for first time buyers this meant there was often no repayment strategy agreed at all.
According to Louisa Fletcher of The Express many consumers expected to review their interest only mortgage after a couple of years when they were in a better position to take on greater costs and were more accustomed to mortgage payments. When the credit crunch and recession hit there were many borrowers with failing endowment policies, whilst others struggled to meet lenders affordability criteria to move onto a standard repayment mortgage, so they were forced to continue their original interest only mortgage deal.
Vishal Gulrajani, Mortgage Broker in Goff’s Oak & Cheshunt, Hertfordshire said:
‘According to the Financial Conduct Authority (FCA), 17.6% of all outstanding mortgages are on some form of interest only element. Now this is a major concern as it is estimated that a large number of these consumers are nearing retirement with no way to pay back the capital owed on their interest only mortgages (Louisa Fletcher, Express). Therefore over the next few years we could see a significant number of borrowers at risk of losing their home and being repossessed by their current mortgage lender if they cannot find a way to repay the capital which is still owed. The good news is that there are now several options that can help individuals in this predicament so they are not left homeless.’
What are your options if you have an interest only mortgage?
There are several options available to you if you have an interest only mortgage. Below are the main three.
- Homeowners can downsize and sell their family home. They can pay off their mortgage and purchase a smaller property from cash and have no mortgage debt allowing them to enjoy retirement. This is often achievable for an older homeowner who has a big family home, as the property may have risen in value and the mortgage debt is small relative to the current value of the family home. After the sale the homeowner is often left with enough capital to purchase a smaller home for cash. However this option may not be available to everyone as some consumers may not have built up enough equity in their property to purchase a retirement home for cash.
- The second option according to Louisa Fletcher of the Express is obtaining a later life mortgage. Many mainstream lenders now go past the age of retirement and offer later life mortgages, so you reobtain finance to keep you in your home for longer. Unfortunately one of the main problems with this option is that lenders will want to see evidence of retirement income and the continuous ability to service the mortgage loan, for example through a pension or annuities.
- The third option is equity release which consists of lifetime mortgages and home reversion plans. The most popular option is to obtain a lifetime mortgage allowing you to take on an interest only mortgage that can replace your existing debt which allows the interest payments to roll up until you die. As a result when you pass away the property is left to your estate and the property is sold to pay the debt. This is a very popular solution as it allows the homeowner to live in their home until they die as the mortgage is not repayable until they pass away. However, it is worth remembering that although no income is needed for this option it is only available if there is significant equity available in the property. Also it could leave your estate with little or no money after the property is sold and the debt is repaid.
Vishal Gulrajani, Mortgage Broker in Goff’s Oak & Cheshunt, Hertfordshire continued:
‘It is alarming how many people coming up to retirement still have an interest only mortgage. However, we recommend our clients do not worry as there are now several options available, allowing them to manage their finances and remain in their home. As a result I urge anyone with an interest only mortgage on their residential home to seek financial advice and call our mortgage brokers in Goff’s Oak, Hertfordshire on 01707 872000. We can offer mortgage advice and recommend the best course of action for your individual financial circumstances. This is especially important if your mortgage is nearing the end of its term or you are close to retirement. Remember there are things you can do, and the process is a lot less stressful than not doing anything at all and then being evicted from your home at a later date.’
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