Interest-only mortgages were once a popular way for people to get the money needed to buy a house, as it meant that they could make lower monthly payments.
This was especially true when mortgage rates were over 10% back in the 1980s and 90s when they were often sold with investment policies called endowments. The idea was that the investment would grow enough to pay off the mortgage, although in very many cases this has turned out not to be the case. In fact research from Citizens Advice shows that around a million people have no plan on how they’ll repay the capital when they get to the end of their mortgage term.
With mortgage regulations being tightened up by the Mortgage Market Review (MMR) last year, interest-only mortgages became a rarity and now, if you can find a lender that still offers them, you won’t be able to take out an interest-only mortgage without a repayment plan already in place.
However, if you’re already on an interest-only mortgage, you need to make sure you’ve got a plan of how you’ll be able to pay it off. Let’s take a look at some of your options.
What it means
An interest-only mortgage means that your monthly repayment only covers the interest on your mortgage – none of it goes towards repaying the capital that you borrowed. This means that you’ll pay a lower amount each month than you would do on a repayment mortgage, which is one reason why these types of mortgages were attractive to homebuyers.
However, it also means that at the end of the mortgage term you’ll still owe exactly the same amount as you did at the start of the mortgage. So if you borrowed £100,000 at the start of the interest-only mortgage, you’ll still have to repay £100,000 at the end.
Ways to repay
If you’ve already got an interest only mortgage you’ve got a number of options:
- You could decide to switch your interest-only mortgage to a repayment mortgage. Your existing lender may be happy to do this. However, this could result in a big jump in your mortgage repayments. For example, if you borrowed £100,000 on a 25 year mortgage 15 years ago you’d now have just 10 years left to repay the capital – which would add £833 a month to your repayments. You may be able to extend the term – but bear in mind that you’ll end up paying more interest if you do. You could also consider remortgaging to a repayment mortgage with another lender.
Ocean could help you find a remortgage deal as we search a panel of lenders for the best option. As we’re a broker, we also have access to broker-exclusive deals that you won’t find on the high street.
- Use a pension lump sum. Changes to pension legislation make it easier to draw a lump sum out of your pension when you retire, and it may be possible to use this to repay the mortgage capital. You should seek advice first though as you may incur tax on the withdrawal and you don’t want to leave yourself short of retirement income.
- Using existing savings and investments (and add to them if needed) – whether you save into a savings account, a cash or stocks and shares ISA, investment bonds or another savings plan you can try to put enough aside to repay the balance once the mortgage comes to an end. If you’re not sure of the best option for you, it’s probably worth speaking to a financial adviser, as they’ll be able to give you some advice on the most effective way to save.
- Sell your house. If you are planning on downsizing or selling up anyway when you get to the end of your term, then this isn’t a worry. You’ll need to be sure that your house isn’t in negative equity (i.e. it’s worth more than the outstanding loan).
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