If you’ve been keeping an eye on the news recently, you may have read that over 11,000 homeowners in the UK are at risk of losing their properties in the next twelve months, as their interest-only mortgage terms expire and they don’t have plans in place to repay their lender. In light of this alarming news, we thought we’d take a closer look at how interest-only mortgages work, how this situation has come about and what the options are for homeowners in East Anglia who find themselves in this position.
How interest-only mortgages work
About four-fifths of all mortgages held today are repayment mortgages, where the monthly payment covers the interest accruing while also repaying the capital balance over the agreed mortgage term. On an interest-only mortgage, the monthly payment only covers the interest, meaning that the amount you originally borrow remains outstanding until the end of the term.
Today, lenders will ensure that you have in place a suitable repayment vehicle – such as an ISA, pension scheme or investment bond – that will pay out enough to clear the mortgage debt when the term expires. Historically, however, lenders did not always check that the borrower had a repayment vehicle in place, which has led to a situation where a proportion of interest-only mortgage holders are not in a position to repay their mortgage balance.
Advantages of interest-only mortgages
Many people who opt for interest-only mortgages do so because the monthly payments are considerably lower than they would be on a repayment mortgage of the same size. That frees up more money each month to potentially spend or to put into savings. Because interest-only mortgages are more affordable, that also means that you can potentially take out a bigger mortgage for a more desirable property than if you opt for a repayment mortgage.
Disadvantages of interest-only mortgages
Due to the fact that the mortgage balance never reduces, you end up paying more interest over the term of an interest-only mortgage than on an equivalent repayment mortgage, where the amount owed – and therefore the interest charged – reduces over the term. As many homeowners in East Anglia and elsewhere are now finding out, the need to have a suitable repayment vehicle in place to clear the debt is also vital – in a worst-case scenario, an inability to repay the balance at the end of the agreed term could lead to the lender repossessing the property.
Why are people at risk of losing their homes?
Historically, as mentioned above, lenders did not always check that the borrower had set up a repayment vehicle in order to repay the mortgage balance – the borrower was responsible for arranging this. Another issue is that many people who took out interest-only mortgages at the height of their popularity in the 1980s and early 1990s took out endowment policies to act as a repayment vehicle.
Endowment policies are a type of life insurance that pay out a lump sum on maturity, or on the death of the policyholder. At the time, this type of policy tended to perform well, in many cases allowing borrowers to repay their mortgage and have an additional lump sum left over. However, through the 1990s and early 2000s, many endowment policies – whose value is linked to stocks and other investments – did not perform as well as expected, with their value on maturity lower than was originally targeted. Crucially, this means that many policies are not on track to pay out enough to repay the mortgage balance as intended, leaving a shortfall that the borrower has to make up by other means. If there is no way of making up the shortfall – or if no repayment vehicle exists whatsoever – then borrowers may have to sell their homes or risk repossession by the lender.
What are my options?
If you are a homeowner in East Anglia and find yourself in this position, there are a number of options to deal with the problem of repaying your mortgage balance. If you have sufficient equity in your property and meet lenders’ age requirements, you may be able to remortgage to clear your debt with the existing lender. If this isn’t possible, there are other financial products that may suit your circumstances.
Both equity release and home reversion plans allow older homeowners to borrow a lump sum (that could be used to repay they existing lender) and continue living in their home, without making further payments, until they die or move into permanent care and the property is sold. A new type of mortgage product – the retirement interest-only mortgage – works in much the same way, but with monthly interest repayments rather than the interest rolling up and being paid on the sale of the property.
Thinking about taking out an interest-only mortgage?
If you are thinking about taking out an interest-only mortgage for a property in East Anglia, it’s important to realistically consider how much you can afford to borrow and whether you can afford both the interest repayments and putting money into a suitable payment vehicle to clear the balance at the end of the mortgage term. Here at The Mortgage Centres, we have over 20 years’ experience in helping people find the right mortgage, and we also have access to lending companies who offer equity release products. Get in touch today to discuss how we can help you.