With house prices rising at an alarming rate over the last 25 years, interest-only mortgages have, for some, become a necessary way of gaining access to the UK’s domestic property market. To many, these financial instruments have been a critical leg-up on the housing ladder. However, the popularity of this type of borrowing brings with it some drawbacks.
An interest-only mortgage will cost the borrower significantly less each month because the monthly repayment comprises just interest. There is no capital repayment element to the mortgage meaning that at the completion of the mortgage term the original loan will still need to be repaid. Of course, as the loan amount never reduces, borrowers actually end up paying more interest over time but early in the mortgage this issue is of little interest to the young first-time buyer.
Initially, interest-only mortgagors either linked their interest-only mortgage to the maturity date of a pension policy or life assurance, or to a specific mortgage endowment policy that would repay the mortgage at the end of the term. However, many never planned a means by which they planned to repay the outstanding debt at the end of the mortgage or endowments and other securities have not performed sufficiently to entirely repay outstanding debt.
The most radical option when a mortgage term comes to an end is to repay the loan by selling your home. However, given that we all need somewhere to live this is usually not a preferred option!
There is good news. If you took a mortgage 25 years ago it’s likely that you now have significant equity in your property due to rises in capital value. Furthermore, the real value of your loan has been eroded over time by inflation meaning that the £60,000 you may have borrowed to buy your first home 15 years ago is now an affordable sum to borrow over the next 15 years.
This should mean that you are well placed to obtain a new repayment mortgage that can still be serviced affordably by you over the next 15 - 20 years, or perhaps more, dependent on your age and personal circumstances. Indeed, as long as you can illustrate a satisfactory post-retirement income stream there is no reason why you couldn’t borrow well past retirement age. If you are now approaching 55 years of age then releasing equity through one of the many lifetime mortgages now available is also a viable option for many.
But one thing is certain. If you are one of the estimated 2.6 Million people with an interest-only mortgage that expires within the next 10 years, now is the time to at least consider how you are planning to repay it. It is reported that as many as 260,000 people have no plan whatsoever for how they will repay their outstanding home loan at the end of the mortgage period - a sobering statistic.
At Mortgage Required we have been considering options for our clients with interest-only mortgages for some time now and we have lots of ideas for you to consider. If you have an interest-only mortgage that expires before 2028 then don’t delay. Call us now on 01628 507477 to see how best to plan a stress-free solution that meets your needs.
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