Repaying an interest only mortgage – your quick guide

Here’s a quick checklist of things to consider when facing the reality of repaying your interest only mortgage:

 

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Check your latest statement for an exact amount owing

 

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Check your repayment plan to see if it’s on track

 

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If there’s a likely shortfall, speak to your lender and ask them for options available

 

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If you need to take action, then weigh up your options. These could include these below:

 

Options to consider

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  • Overpaying your mortgage. Most lenders allow borrowers to pay up to an extra 10% each year. If the mortgage is ending soon, then this may not clear the debt in time.
  • Extending your mortgage term and starting to repay some of the capital. This depends on your age and your lender’s criteria. Most lenders require the loan to be repaid by your 75th birthday.
  • Using an equity release loan to clear the outstanding interest only mortgage. Remember, you could be paying interest on this for the rest of your life.
  • Considering if you have any spare savings available. Although spending these savings may impact other plans.
  • Considering dipping into your pension pot. Perhaps you can take a tax free lump sum? Don’t forget, any money withdrawn from your pension is likely to reduce your future retirement income.
  • Taking out an unsecured loan. If you have spare income and it’s sustainable, then an unsecured loan may be the solution.
  • Downsizing. This may release enough equity to repay the interest only mortgage balance and provide cash to buy a smaller home. Don’t forget to add in all the costs of moving; taxes, estate agent and legal fees, plus moving costs.

More about Interest Only Mortgages

What is an interest only mortgage?
With an interest only mortgage you can borrow money to buy a property and keep payments lower because you only pay interest on the capital each month. As your monthly payments don’t pay off any of the loan, you need a method of paying the full amount back at the end of the mortgage term in one lump sum.

How do borrowers pay off the capital?
Lenders will want to know how you plan to pay off an interest only mortgage before agreeing to lend you any money. Acceptable repayment strategies for many residential interest only mortgages include a savings plan, an investment portfolio, a pension or other assets you plan to sell. Capital growth, where you count on the value of your property rising over the term of the mortgage, may be an acceptable strategy for up to half of the loan required, which means any balance would need to be on a repayment basis.

Why is it harder to get one now?
Since the 2008 financial crash, the number of lenders offering interest only mortgages has fallen and lending rules have become much stricter. UK Finance estimates there are about 1.7m outstanding interest only mortgages in the UK and many borrowers don’t have a fully formed repayment plan in place. This is a potential concern for many people.

What can I do if I have a shortfall?
First, speak to your lender and see what options they can offer. If that doesn’t provide a solution, then speak to a financial adviser as they can take a broader view of your finances and help you work out a plan.

The Over 55s Unsecured Loan
At free2, we can offer the Over 55s Unsecured Loan which is another option for repaying the outstanding capital. You can borrow from £15,000 up to £150,000 over 5 to 20 years (depending on your age). Payments are fixed for the whole loan term and there are no early repayment charges. If a borrower dies before the loan is repaid, then any outstanding debt is wiped off. (Ts & Cs apply.)

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