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Interest Only
GET EXPERT ANSWERS TO YOUR INTEREST ONLY MORTGAGE ISSUES!
Interest only mortgages have trodden a bumpy path in recent years. Their popularity stems from the fact they deliver lower monthly payments, making them more affordable for many. However, those payments cover only the interest due on the loan. The capital never reduces, leaving homeowners with the challenge of finding another way to pay off the amount originally borrowed.
The number of these home loans has dropped in recent years. In 2012, 3.2 million interest only home loans were active. This fell by 46% in the next six years, dropping to 1.7 million outstanding loans by 2018, according to statistics from UK Finance. Older customers are more likely to possess such a loan too, with 70% of all mortgages of this type held by the over 45s.
The figures prove that many of those facing the end of their loan term are approaching retirement. At a time when they should be easing up and enjoying their newfound free time, many are concerned over how they will pay off their outstanding loan. While it is tempting to avoid thinking about it, this is the worst thing they could do.
Here we explore the possibilities, challenges, and questions posed by an interest only home loan. Read on to find out what you could do if you are in this situation. There are solutions, so take heart – you may be about to find out what will be best for you.
WHAT HAPPENS WHEN MY INTEREST ONLY MORTGAGE COMES TO AN END?
It is important to consider all your options if you know your loan is approaching its end. The sooner you do this, the more options you have. Statistics indicate that around 80% of those with outstanding interest only loans have already spoken to their lenders and looked at ways to repay the capital. However, this still leaves 20% who have yet to do anything about it.
If your mortgage is approaching its final stages, you have several options to consider:
- Extend the terms agreed with your current lender
- Switch to a different lender
- Pay off the full amount owing to clear the loan
- Use equity release to get the cash from your home
- Cash in investments, i.e. endowment policies, to cover the repayment sum
The most important thing to do is to evaluate each of the above options as soon as you can. Some will be inappropriate or impossible for your situation. Others will look more promising. Don’t put it off – look at all possibilities and options and do not be afraid to speak with your lender. They are more likely to look favourably on your situation and offer to assist if you contact them before it is too late.
CAN I EXTEND MY MORTGAGE TERM ON INTEREST ONLY?
In theory, you can extend your existing terms with your current lender. However, this is not always possible. Your lender will want repayment of the amount owing. Depending on your age, they may refuse you.
If you want to pursue this route, be sure to contact your lender as soon as possible. Don’t leave it until the last moment when the lender contacts you to find out how you intend to repay the loan. They will appreciate you acting, especially if you can show you have plans for saving and repaying the capital amount you still owe.
HOW DO I GET OUT OF AN INTEREST ONLY MORTGAGE?
Your loan was agreed with your lender, so you will not be able to exit that loan unless and until the amount is paid off in full, or you manage to strike another agreement with the same lender. This means you must work out how you will pay off the capital amount you borrowed. We discussed the various solutions above, and while some may not apply to your situation, others may prove ideal.
The idea behind such loans is that you should make investment arrangements you can then cash in when the loan falls due to be repaid. However, many people who diligently set up such arrangements have discovered they are not worth as much as they thought they would be. This has left many with a shortfall – some bigger than others.
If you do have investments set up, sit down and crunch the numbers. Work out what they are due to pay out to you. If there is a shortfall, make a note of it.
Consider other options that could help you meet that shortfall. Selling your property and downsizing is one, as is equity release. This involves releasing some of the value of your property to pay off the outstanding capital on your mortgage. However, rather than moving out and downsizing, you will be able to remain in your home.
Equity release will either take the form of a lifetime mortgage or a home reversion plan. The first option is much like a regular mortgage, requiring monthly repayments. The second option provides a lump sum which is then paid back when your home is sold upon your death. It is wise to get independent financial advice regarding each of these options before you consider taking this route.
HOW DO I FIND OUT ABOUT A MORTGAGE?
Start doing some research as soon as you start thinking about the possibility of buying your own home. The more you know, the easier the process will be, as you’ll understand more of the various stages involved in applying for and getting a home loan. There are many good and basic guides online that assume no prior knowledge of loans like these.
Our advisers are standing by to guide you. We have access to a large range of deals offering varied interest rates on different LTV (loan to value) amounts.
WHAT ARE THE CURRENT INTEREST RATES FOR INTEREST ONLY MORTGAGES?
The prevailing base rate is still at a low level, despite it rising in recent years. In August 2016, it sat at just 0.25%. The current level is higher than this so even with recent it remains historically low – Although the bank rate remains low the mortgage rates will be higher than this and dependent on your individual circumstances.
Rates are always changing as lenders compete to get the biggest slice of the market. Monthly payments will be smaller for interest only deals as none of the capital has been paid off. The usual rule applies – whichever loan you decide to get, shop around to make sure you get the most competitive deal. This applies whether you are getting a loan for the first time or remortgaging partway through your loan term.
Seeking help from a broker is also a good idea. Brokers often have access to deals and lenders that are missed by customers looking at the most common sources of mortgage deals. They may be able to find you a better deal than you could find on your own.
CAN I SWITCH TO A DIFFERENT LENDER?
Yes; this situation is much like switching mortgages if you spot a better deal elsewhere. As always, you would need to consider the available deals and see which one makes the most sense for you. With many more repayment deals on the market than interest only ones, you may well find interest rates are more competitive too.
Switching lenders will likely be easier if you switch from an interest only deal to a repayment one. This means you will begin paying off the capital you borrowed straightaway. Lenders prefer customers to have repayment deals, so you are less likely to have trouble making the switch in this scenario. Of course, you must still meet all affordability requirements and prove you can make the required payments each month.
If you wish to switch to another interest only lender your broker will make sure that you still fit the lender’s interest only lending criteria which differs from bank to bank.
CAN I REMORTGAGE AN INTEREST ONLY MORTGAGE?
This is another possibility you could consider. You may be able to move some of the amount owing onto a repayment mortgage, where the interest and some of the capital are repaid each month. However, most people would be unable to afford the much larger monthly payments that would be required in this scenario. A lot will depend on how many years remain on the loan. The longer you have ahead of you, the more manageable the payments could potentially be.
The alternative is to switch part of the loan onto a repayment loan, while simultaneously extending the term. This would reduce the monthly repayments while providing a guarantee that most or all the debt would be cleared once the term ends.
CAN I SELL MY HOUSE IF I HAVE AN INTEREST ONLY MORTGAGE?
Yes, you can. Over time, property prices tend to increase. The rate of increase varies according to the area you live in and the type of property you own. However, most people will see a notable rise in the value of their home over time. Some people sell their property to benefit from this rise in prices.
For example, let’s assume you took out a mortgage for £100,000 to cover the purchase of your existing property. Your home is now worth £220,000. This means that selling it would allow you to pay off the full £100,000 in capital you originally borrowed. Of course, you would then need to look for another property elsewhere. The £120,000 capital you now have in cash would be put towards that property, but it may not be enough to fund the entire purchase.
So, another loan would likely be required to help you complete the purchase.
However, it could be that your home has not risen in value by as much as you would like. This would leave you at square one, with very little capital to put towards the cost of your next home. In some cases, people experience a fall in house prices that makes a home sale unsuitable for resolving the problem.
Downsizing is a popular choice for many who are approaching the end of their interest only deal. A 2013 survey by the Financial Conduct Authority (FCA) revealed 19% of those questioned intended to move into a smaller property to free up the cash they needed to clear their loan.
WHAT SHOULD YOU DO IF YOUR INTEREST ONLY HOME ADVANCE IS ENDING SOON?
Act as soon as you can. Consider all the potential options. Some may not be viable for you whereas others may look more promising. Speak to your lender. Don’t assume they won’t come up with an alternative mortgage product for you. Discussing all the options means you will know what you face. Ignoring the issue until the last possible moment could see you lose your home or fall into a troublesome financial situation. There are solutions and the sooner you consider them, the easier it will be to resolve your predicament.
The team at The Ample Mortgages is experienced in providing advice and support to those looking to remortgage. Fill in our contact form today to find out more.
CAN I EXTEND MY INTEREST ONLY LOAN?
As described above, it is possible to extend your loan. You have the option to either extend on an interest only deal or to extend by switching some or all of it onto a repayment loan. However, if you do not put in place plans to clear the capital by the end of the extended loan term, you will be in the same position you are in now.
However, it is unlikely you can let the loan finish and then get a new interest only one to replace it. You must meet current affordability rules regardless of the type of home loan you wish to take out. Those with 25-year loans that are approaching their end are likely to hit retirement age before paying off a second loan. It is wise not to simply assume you can extend your loan or take out a new one to replace it.
WHEN IS AN INTEREST ONLY MORTGAGE THE RIGHT OPTION?
Real Life Case Study 1 – Jason and Ally Lewis
Jason (age 50) and Ally (age 54) have no children and plan to retire in the next 10 years. They had a repayment mortgage which was due to finish in 7 years’ time and over the years had kept increasing their mortgage amount to do renovation work on their home, increasing the value. However, with a short mortgage term the monthly cost of the mortgage started getting expensive and at a level that both were not happy with and were starting to struggle with which meant they had to forgo holidays which was the one thing they both loved doing.
After some consideration and discussion, they decided to switch the mortgage to an interest only mortgage to decrease the monthly cost by over 50 per cent. This meant they had the funds available to live the lifestyle they wanted to and to afford the holidays they both enjoyed. For them, having the house paid off was not their main priority – As they had no children or close family to leave the house to, so why not enjoy their wages for the here and now?
We looked at what ‘Equity Release’ would give them when their mortgage term was due to expire, as the mortgage lender would still require the mortgage to be paid back in full. Equity release based on today’s property values and their future ages allowed them to release a high enough percentage of their house value to clear the mortgage in full when it was due to be paid.
Thus, an interest only mortgage for Jay and Ally, based on their individual circumstances made sense. They were also fortunate that they fitted the lenders criteria for an interest only fixed rate mortgage which was to have more than £150k of equity in the property.
- Can you still get an interest only mortgage?
The answer is yes although the criteria to achieve this is much tougher than what it is for a normal repayment mortgage - Are interest only mortgages a good idea?
Yes, for some people they are but it depends on your personal circumstances and outlook. For example, a mature couple with no children who struggle to make ends meet on a monthly basis, may decide they would rather have more disposable income now (and therefore pay less on a monthly basis for their mortgage if it was on interest only) compared to stretching themselves financially to rush to pay the mortgage off for whose benefit? - How long can you have an interest only mortgage?
This depends on the lender; however, we have seen in recent times lenders extend their mortgage terms to accommodate for this. Some lenders don’t have a maximum age now and most will lend to 75 with few banks lending past this age. - How much deposit/equity is needed for an interest only mortgage? Again, this changes from lender to lender but as a rule of thumb most lenders want at least 40% equity or deposit with a minimum of £150,000 being made available.
- Can I do debt consolidation on an interest only mortgage?
Potentially yes but this would depend on many factors as not every lender would allow this. Income, debt to income ration, track record would all need to be taken into account and some lenders simply will say ‘NO’ based on their criteria. - Are home improvements allowed on an interest only mortgage?
Yes - Can you move from a repayment mortgage to an interest only mortgage?
Yes
