Interest only mortgage where the borrower only pays the interest on the mortgage through monthly payments for a fixed term became very popular in the years leading up to the credit crunch in 2008. They were a major factor in the problem created by irresponsible lending which allowed consumers to borrow beyond their means in order to afford sky rocketing property prices.
Following up from the crisis and recession most lenders have stayed away from the interest only mortgages market reacting to stricter lending regulations introduced in 2012. However, according to the Guardian, soaring house prices have recently tempted some lenders to reintroduce these type of loans.
Having said that, the new interest only mortgages are based on high loan to value ratio and require a clear re-payment plan and high income so they are not for everyone. Whilst these types of loans have many risks attached to them they can be a good option in the following situations:
- They may be a good solution for people with variable incomes, such as sales staff on commission or workers with large irregular bonuses, who want to pay back the capital when they have the money available.
- They also suit landlords who want to take an income from their property but will eventually sell it to clear the loan.
However, City watchdog the Financial Conduct Authority has been putting pressure on lenders to remind customers that they will need to repay the capital. The ‘payment shock’ associated with the introduction of capital as well as interest payments at the end of the loan can affect all borrowers. It particularly affects older borrowers who are unable to re-mortgage to a cheaper deal and younger borrowers who may not be able to afford the higher payments.
If you are on an interest-only loan without a repayment vehicle in place, or face a shortfall from an investment, there are a few options opened to you:
- Switching to repayment: This is ideal but the jump in payments can be frightening. For example, a £150,000 25-year loan on an interest-only basis with a rate of 3% costs £375 a month, but jumps to £711 a month on a repayment deal, according to London & Country.
- Part-repayment, part interest-only: Some lenders such as Santander will let you take 50% of the loan on an interest-only basis with the rest on repayment. This could be a “stepping stone” option for borrowers with an interest-only mortgage who cannot afford the jump in repayments in one go.
- Make overpayments: If your lender will allow this, and you can afford to do so, you may be able to overpay each month. Most lenders will let you overpay by up to 10% of the mortgage amount per annum. Any sum you pay off will no longer be liable for interest, seeing more of your monthly repayments go towards the capital.
- Downsize: This makes sense for couples where children have left home and bedrooms are empty. Alternatively, those over the age of 55 can convert to a Lifetime mortgage – an equity release scheme that means you can stay in your home and the loan is paid off when you die.
- Extend your mortgage term: A longer timeframe to repay the mortgage may allow you to build up a repayment vehicle for the loan, or make switching to a repayment mortgage much more affordable.
If you are unsure as to the best option to suit your circumstances I will be happy to review this with you and provide you with some tailored options. Get in touch to book an appointment.
Your property may be repossessed if you do not keep up repayments on your mortgage.