Interest only Mortgages

According to predictions produced by Experian for the Financial Services Authority (now the Financial Conduct Authority, or FCA) in 2013, Over 80,000 interest-only mortgages are due to mature in 2019, leaving some homeowners having to repay their capital loan in full, in one go.

If you’re in that unenviable position, you’ll need to find out what your options are. In this guide, we look at the problem in detail, including giving you some ideas on how to deal with a potential cash shortfall.

What’s an interest-only mortgage?

If you have an interest-only mortgage, you will only be required to pay the interest on your loan every month. That means that the size of the actual debt you owe remains the same throughout the mortgage term. When the term ends, you’ll be expected to repay the lump sum you borrowed in one go.

That’s different to a repayment mortgage where you’ll pay back both the capital loan and the interest it attracts each month. By the end of the term of the mortgage, you’ll have repaid everything that you borrowed.

What does the Financial Conduct Authority (FCA) say about interest-only mortgages?

In 2013, the FCA identified three key periods when the most residential interest-only mortgages would mature. Those periods are 2012 to 2020, 2027 to 2028, and 2032. So, according to the FCA’s analysis, in 2019, 81,400 interest-only mortgage deals worth around £9.2bn would be due to mature. In 2020, a further 82,100 would mature.

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What’s the issue with interest-only mortgages?

FCA Executive Director for Retail and Authorizations, Jonathan Davidson, said:

“We know that many customers remain reluctant to contact their lender to discuss their interest-only mortgage for a variety of reasons. We are very clear that people should talk to their lender as early as possible as this will give them more options when it comes to the next steps they can take.”

If you took out an interest-only mortgage, you should have had a plan in place to ensure that you would have the necessary funds to be able to repay the capital loan you received, in full, at the end of the mortgage term.

So, if you didn’t make provision to repay what you owe, you could be in trouble. Before the credit crunch, house prices were rising, making interest-only deals very popular in the residential mortgage market. Since that time, there have been concerns raised that some homeowners may have taken out interest-only loans with no realistic way of paying them back. And many borrowers didn’t fully understand how the mortgages worked.

In 2015, lenders began contacting all their interest-only mortgage customers who had loans that were due to mature before the end of 2020, to make sure that they would be in a position to repay their loans. However, in 2018 the FCA discovered that engagement rates between lenders and their clients are typically low. In its 2018 review, the FCA warned that predicted shortfalls in borrowers’ repayment plans would lead to “significant numbers” of people losing their properties.

Repayment Plan Problems

You may have been relying on the value of your property increasing so that the equity would cover the original loan. That might not be a viable option now if house prices haven’t escalated quickly enough.

Also, you could discover that if you intended to remortgage, you could find your options are limited because of your increased age and potentially static or decreased income. For example, some lenders will only extend your mortgage term, grant you a remortgage, or a mortgage switch up to your retirement age.

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What can you do if your repayment plan is likely to fall short?

Options to consider if your repayment plan is likely to fall short

Remember that if you can’t repay your loan, you could lose your home. So, if things are looking dicey, and you’re concerned about how you’re going to pay back the capital loan element of your interest-only mortgage, what can you do to avert disaster?

Begin overpaying your mortgage

If you pay more off the interest element of your mortgage each month, that could help you start bringing down your debt. Most lenders will let you pay up to 10% more of the outstanding mortgage every year, but be sure to check your agreement’s terms before you try this strategy.

Extend your mortgage term

Extending your existing mortgage term could buy you more time to invest money or for the value of your property’s equity to increase. That could allow you to make up the shortfall if you sold your house.

Consider a retirement interest-only mortgage

Many lenders are now offering older borrowers retirement interest-only mortgage deals to help them move away from their original interest-only deal. These deals allow you to repay your loan when you sell the property, die, or move into residential care. However, some of these deals do have a set term. And although you’ll be able to keep your home during your lifetime, you won’t be able to pass it on to your children.

Switch to a repayment mortgage

Your lender might let you switch to a repayment mortgage. However, you must remember that this tactic would cause a major hike in your monthly payments in the short term. That said, you could be able to bring your payments down by extending the term of the mortgage or choosing a part interest-only, part repayment deal.

Sell your home and move

If the value of your property has increased, you could sell your house and use the equity to pay back the capital loan. Provided you have sufficient funds left; you could then buy another house. However, that is only a viable option if you don’t have negative equity where the value of your home has fallen since you first took on the mortgage.

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Was my interest-only mortgage mis-sold?

If you think you may have been mis-sold an interest-only mortgage, you may be able to claim compensation.

You could have been mis-sold your interest-only mortgage if the lender or mortgage broker failed to explain that you would only be paying interest on the loan each month, or didn’t ask you how you would repay the capital loan at the end of the mortgage term.

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