Interest Only Mortgage: What Are My Options?
Interest-only mortgages were once popular among home buyers across the UK. Today, a growing number of major banks and lenders are rapidly phasing interest-only mortgages out of the picture. Primarily due to a growing lack of interest among borrowers.
With an interest-only mortgage, the subsequent monthly repayments cover only the interest on the loan, but not the capital. The advantage being that the average monthly repayments on an interest-only mortgage can be extremely low. However, you’re still liable to pay back the full amount you owe on your home at the end of the term, in one lump sum.
For obvious reasons, this can result in issues for those who simply do not have the funds available to pay off their loans.
More often than not, borrowers taking out interest-only mortgages use savings systems like ISAs to amass the money they need over time. The flexibility of an interest-only mortgage can be great, but there are no guarantees the borrower will have enough money available at the end of the loan term.
There are currently around 1.6 million outstanding interest-only mortgages in the UK, and repayment difficulties are surprisingly common.
Handling Repayment Difficulties
If you simply do not have enough money saved to pay off your mortgage at the end of the term, it’s important that you consider your available options at the earliest possible stage. The earlier you take action, the easier it becomes to avoid outright disaster.
There are four basic options available in such circumstances, as outlined below:
1. Take out a new interest-only deal
If you are deemed eligible, you may be able to enter into a new interest-only mortgage. This will depend on the value of your property, your current financial position and your age. It can be a challenging and potentially costly process, but could also prevent your home being repossessed. Speak to your lender or independent broker at the earliest possible stage.
2. Switch to a repayment deal
Again, depending on your personal circumstances and value of your property, it may be possible to switch to a more conventional mortgage deal. Rather than paying off the money you owe in one lump sum, your lender may be willing to organise a more gradual repayment deal. This is one of the most popular options among struggling borrowers, as it provides the opportunity to maintain ownership of their property and repay their debts over several years. Interest rates and additional borrowing costs will apply.
3. Sell your home
Another viable option is to sell your home, repay the money you owe and hold on to the rest of the proceeds yourself. This can be particularly useful if the value of your home now significantly exceeds its original purchase price. However, there’s every possibility the value of your home will not cover the amount you owe. Again, it’s important to seek expert advice at the earliest possible stage, if considering this option.
4. Take out an equity release plan
Last but not least, equity release plans provide homeowners with the opportunity to tap into the capital tied up in their homes. You release some or all of the value tied in your home, repay your interest-only mortgage debt and make subsequent ‘rent’ payments to the new lender. Depending on the value of your home and how much of it you own at the time, you may be able to repay your interest-only mortgage and continue to live in the property rent-free. As equity release is by no means suitable for all homeowners, it’s important to seek independent financial advice before making your final decision.