Thousands of people with interest-only mortgages expiring this year do not have a repayment plan, putting their homes at serious risk of repossession.
40,000 interest-only mortgages are set to mature in 2016, but experts suggest that only half of these homeowners have the capital in place to repay the loan. And according to the charity Citizen’s Advice Bureau, this is just the tip of the iceberg, with 934,000 interest-only borrowers without a plan to pay off their mortgage.
The ins and outs of interest-only
Unlike a repayment mortgage, where the borrower pays off the capital and interest on their loan each month until the debt is cleared, an interest-only loan offers a cheaper monthly premium but requires a single repayment of the capital at the end of the term. Normally this is cleared using the proceeds from a separate investment vehicle.
For example, a £150,000 mortgage at 5% over 25 years would cost £877 per month on a repayment basis, but only £625 per month interest-only. However, the latter leaves the original £150,000 capital debt to be repaid.
Since 2012, anyone taking out an interest-only loan must have a repayment plan in place which has led to a drop in the number being sold.
Don’t get trapped
If you have an interest-only mortgage but no repayment vehicle in place, it is critical you review your finances as a matter of urgency. Depending on the term left on the mortgage you could set up a repayment plan now, or look at switching to a repayment mortgage. This may mean higher monthly repayments, but there are a lot of competitive deals in this current low-interest rate environment. Another option could be to sell your home and downsize – something that may be possible if older children have flown the nest but nevertheless a difficult decision if you don’t want to lose a cherished family home.
If you are concerned about your mortgage, or you need advice on a suitable investment vehicle, please get in touch.