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Ian Symmonds from Easy Street talks about Interest-Only Mortgage Expiring on the latest Mortgage & Protection Podcast
What happens when my interest-only mortgage comes to an end?
When your interest-only mortgage terms comes to an end, in simple terms, this is when you are due to repay any capital outstanding in full to your lender.
At the outset, the lender would have asked how you plan to repay the capital at the end of the term, examples include investments, savings, downsizing, and this is when this plan comes into play.
So hopefully, by the time your interest-only mortgage comes to an end, everything has gone according to plan and you can repay your interest only mortgage in full.
However, in reality, it doesn’t always work out like that so the risks need to be carefully considered.
What are my options if I can’t repay the capital of an interest-only mortgage?
Various options can be considered. These include:
Extending the term with the current lender
If you don’t wish to repay the mortgage, staying with your current lender could potentially be a straightforward option. However, the lender may only do this for a short time and may also want you to switch to repayment which could cause affordability issues so this could only be a short term solution and it would be a good idea to seek advice.
Switching to another lender
Another option if you don’t wish to repay the mortgage could be to look at an alternative lender. Other options may allow you to keep the loan on an interest only and may offer a longer term, but again it’s a good idea to seek specialist advice with this approach.
Retirement Interest Only or Lifetime Mortgage
If you’re over 55 and taking out a lifetime mortgage or retirement interest only mortgage when your existing interest only mortgage has come to an end may be an option worth considering, but again it’s best to seek specialist advice to make sure that this is the most suitable approach for you.
Using Savings, Pensions or Investments
If you would rather repay the loan, you could potentially use pensions, savings and/or investments. However, this may leave a shortfall in other areas so it would be a good idea to seek advice from a suitably qualified Independent Financial Adviser.
Selling Another Property
You may be in the fortunate position to own another property, either by way of a second residence or holiday home or perhaps an investment property. Selling or releasing equity from another property could give you enough to repay, but you would have to consider the effect this approach would have on your plans and the loss of income you may be receiving from an investment property.
Alternatively, you could sell your existing home to repay the outstanding mortgage and look to purchase another with the remaining equity. However, this could mean moving to a smaller property and/or a different area so you would need to make sure you are comfortable with this.
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How long can you stay on an interest only mortgage?
The term of the interest only mortgage is set when you apply and is usually 25 years, but this can vary depending on the lender.
If you’ve come to the end of an interest only mortgage, the existing lender may extend the term, but this will be at their discretion and is not guaranteed.
If you are aged 55 or over, you may be able to get a Retirement Interest Only mortgage (or RIO for short). These mortgages can be made available with no end date and are designed to be repaid when you either pass or move into long term care, but you should seek specialist advice before considering this type of mortgage.
Can you extend the term of an interest only mortgage?
It may be possible to extend the term of an interest only mortgage, but this will be dependent on each lender. If they do agree to extend the term, likely, it will only be for a short time and they may also wish to try and move you to capital and interest which may affect affordability.
Alternatively, you could consider switching lenders to one that will consider a longer term or perhaps a retirement interest only or lifetime mortgage if this is suitable and appropriate.
Can I get an interest-only mortgage at 60?
This is potentially possible, but each lender will consider a person’s financial circumstances differently. For example, some may be happy to consider earned income, regardless of age. Some lenders may only accept earned income up to a certain age i.e. 65-70 and some may want to focus purely on a person’s retirement income. Some lenders may consider a combination of earned and retirement income.
If you are in a position where you don’t meet the affordability requirements for a standard mortgage or a retirement interest only mortgage, a lifetime mortgage where you elect to make monthly interest may be suitable. These types of mortgages don’t have affordability assessments and by electing to make the monthly interest payments, you avoid the roll up of interest, as long as you keep up the monthly payments.
There are usually more options than you would think if you’re looking for an interest only mortgage at 60. This is a good thing, but also means you should explore all your options to make sure you do what’s right for you.
Can you claim back on an interest only mortgage?
In the past, there have been issues around the advice given on interest only mortgages.
An example was when endowments (which are a form of investment) were sold alongside interest only mortgages. The idea was that the endowment would be worth more than the interest only loan by the end of the term. However, in reality, in a lot of cases, the endowment was worth a lot less than what was required, and this left people with a shortfall.
The issue was that the risks were not clearly explained at the outset, and this led to many people making complaints to claim compensation.
Since 2008 when the Mortgage Market Review took place, Interest Only mortgages have been subject to much more regulation and scrutiny to ensure that they are only recommended where appropriate and that borrowers fully understand the risks and their responsibilities
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What are the advantages and disadvantages of an interest-only mortgage?
The main advantage of interest only is that not making capital payments, keeps the monthly repayments lower.
This is suitable for people who would rather put that money into savings and investments which will be used to repay the loan at the end of the term.
It’s also appropriate for people who would like more disposable income and plan to sell the property at the end of the term.
This can be either standard borrowers who plan to sell up when they near retirement or for people who have already retired borrowers with the loan being cleared when they either pass or move into care (Retirement Interest Only or Lifetime Mortgages)
The main disadvantages come down to risk.
For the person who wishes to save and invest, they run the risk of a shortfall at the end of the term. This is why in a lot of cases, lenders set a minimum income requirement for people wanting interest only mortgages.
For those looking to sell at the end of the term, the risk is that they don’t know for sure whether they will want to move and downsize when the time comes. They also won’t know what their property will be worth at the end of the term. This is why in a lot of cases, lenders set a minimum equity requirement where the plan is to sell the property at the end of the term.
For those who are retired and wish to keep the loan until they pass or move into long term care, this will reduce the amount of their estate and therefore the amount they leave to their beneficiaries.
In addition, you pay a lot more interest over the term with an interest only mortgage when compared to a capital and interest mortgage as the loan amount isn’t reducing over time.
Will the lender repossess my home?
Technically, the contract will state that at the end of the term, you have to repay the lender what you owe them. If you are unable to do this, the lender does have the right to start legal proceedings and a few such stories have been reported in the press in the past.
However, in reality, lenders will look to support borrowers wherever they can. They will look to work with you and it’s now common for lenders to send regular reminders way in advance to confirm that a borrower needs to have plans in place to repay the loan on the agreed date.
The good news is that in most cases, there are solutions for people that have come to the end of the interest only mortgage. Whether this is extending the term with the current lender, switching to another lender or looking at retirement interest only or lifetime mortgages more often than not there tends to be a solution.
I haven’t got enough money to pay interest on my mortgage – what can I do?
If you would like to keep the loan and your property, you can either –
- Speak to your existing lender to see if they will extend the term
- Switch to another mortgage lender
- Look for a retirement interest only (RIO) mortgage
- Take out a Lifetime Mortgage
If you would like to repay the loan you could –
- Ask for assistance from family
- Use savings, pensions or investments
- Sell another property
- Sell your home and downsize
Anything you would like to add?
For some people, it can be stressful coming to the end of an interest only mortgage. Lenders will send out letters and reminders and sometimes people can fear the worst.
The good news is that there are many options available, even for those who are over the age of 60 or retired. The important thing is to seek advice as quickly as possible so that you know your options and are prepared well in advance.