A few of you may have noticed that mortgage lenders are now making sure that they remind you that you have an obligation to have saved the amount of money you owe them if you have an interest-only mortgage.
Interest-only mortgages are great in the short term. You only pay the interest amount monthly, and making lower payments throughout the term of the mortgage. However it is important to understand that in the majority of cases you will still owe the full property amount even 20 or 30 years down the line.
Most people that consider this type of mortgage option should have had a reliable investment opportunity that will allow them to accumulate the full amount in time. This could include a savings plan, such as a PEP or Isa or even an insurance policy. In some cases it could even be the sale of a business or other asset or even shares in something, but it has to pay out and go toward redeeming the amount outstanding on any mortgage.
If, however, you don’t have a plan in place to pay of this capital amount, you risk losing your home as you will be unable to afford the repayment of the outstanding mortgage.
Unfortunately, a lot of people who have chosen this interest only option, may not have a reliable investment opportunity behind them and so mortgage lenders are concerned about their lack of investment and the ability to repay the outstanding mortgage amount at the end of the term.
It’s your responsibility to ensure that you can cover the capital cost at the end of the contract, but if you have left it too late, you may want to consider these options:
Use your current savings-
Whether they were for a family holiday or your children’s university fees, you don’t want to lose your house. You may need to dip into your savings and ask your mortgage lender about overpayments- meaning you pay more off monthly than initially originally decided.
Create a Budget-
Count every penny that you spend and stick to a monthly budget so that you can start saving for that capital amount. We’ve created a great guide that lists all of the fees you should include to help you budget. You can read that here.
Switch to a Capital and Interest Mortgage-
You can ask your mortgage lender if you could switch your mortgage type to a Capital and Interest mortgage. Your monthly re-payments would increase as you would begin to pay off the capital amount as well as the interest, however, this can help you budget each month.
Extent your repayment time-
Ask your mortgage lender if adding some extra time onto your due date is an option. This will give you more time to save to pay of the original loan.
However his is now proving to be far more difficult to arrange given the Financial Conduct Authorities (FCA) guidance on lending past retirement age, and on which most if not all of the lenders and Banks are adhering to.
This in effect has made it almost impossible to let any mortgage agreement go past a males 65th or a females 60th birthday.
However this lack of repayment vehicle may be the reason why the customer demand for Equity Release products is increasing and is often seen as a potential way of redeeming the outstanding mortgage.
Expert Financial Advice-
Speaking to an expert can help you figure out exactly how much you need to budget to help pay the mortgage capital back.
For those of you who are confident about paying back your capital fee, it’s always a good idea to check that this is still on track. Whether you are going to use your pension, have stocks and shares or a savings account, it’s always a good idea to make sure the money is still being accumulated.
Here’s a few ways of keeping up with your money:
Double check that the time you have to repay your mortgage is enough time for your money (nest egg) to build.
Depending on who manages your money, whether it be a bank manager, financial advisor or stock broker, keep checking that the right amount of money is being put away.
If, for whatever reason, things aren’t adding up to the amount you expected, ask whoever is responsible for your money to estimate how much you will need at the end, and organise another way to save the money before your mortgage is due to end.
It may be a good option to ask your mortgage lender if you can make overpayments. This would mean dipping into your regular bank to top up the amount you need each month. This way you can have peace of mind that the money is being saved and that you won’t allow it to spiral out of control.
As mentioned above, even if you think the new repayments aren’t a lot, create a budget. You may be surprised at how much you can save too. Have a read of our Budget Guide here.
The best thing that you can do would probably be reach out for professional help. A financial advisor would probably be the best person to speak to about your options.
Remember to make a clear plan of all of the steps that you need to do next. Meeting your repayments is crucial, without preparation, you may miss something and if you can’t pay your capital amount when it’s due, you will lose your property.
Whatever you do, do not ignore the letters coming through your door from your existing lender.
As even though most of these institutions were not bothered how you intended redeeming you r mortgage when this was arranged several years ago, we are now in a completely different scenario hence their determination to understand exactly how you intend paying off the outstanding capital on your interest only mortgage.
If you have found this article useful, you may also like to read How to Choose the Most Suitable Mortgage For You in our Knowledge Base.