That interest-only mortgage sounded like a good idea when you took it up all those years ago but now the term is coming to an end there is a startling realisation, you owe someone a very large sum of money, and if you are in the same boat as over half a million others you have no simple way of paying it back.
In this article the guru will dig into interest-only mortgages, and most importantly, what happens at the end.
So let’s start from the beginning. You probably know that a mortgage is a loan, most likely lent by a bank or building society, secured against a property. The lender makes money on the loan by charging interest on it.
There are 2 main types of mortgage, a repayment mortgage and an interest-only mortgage. With the repayment mortgage both the loan amount and the interest owed are factored in to the repayments, which are generally made on a monthly basis for the term of the loan. With this type of mortgage when the last payment is made at the end of your mortgage the total loan amount has been paid off.
On an interest only mortgage (as the name suggests) you still make monthly repayments only in this case you are just servicing the interest payments each month. This means that although your monthly payments will likely be less than for a repayment mortgage when the final payment is made at the end of your term, there is an outstanding balance at the end, which is the entire amount of the original loan.
As we’ve just learnt when an interest only mortgage ends you still have the entire initial loan amount outstanding which you are expected to pay or face the consequences.
Your lender will let you know in advance of this date, often sending a letter at 12 months before the final payment is due, then 6 and then again as the date gets closer so it should not come as a surprise. Still many people find themselves in a very difficult situation, having to raise a substantial sum of money in a relatively short period of time is no easy feat.
Although back in the days when interest only mortgages were fairly common place your lender might have asked you what ‘vehicle’ you are going to use in order to pay the loan off at the end of the interest-only mortgage term, the majority of people whose final balance is soon to be due don’t have the means to pay off the mortgage.
If you have the cash in the bank ready to pay off your mortgage then happy days, you can just simply transfer the outstanding interest-only mortgage balance to your bank at the end of the mortgage term and move on with your life. If you have some other less liquid assets that you need to cash in to pay off the debt then you will need to factor in the time it will take you to access that cash. For example if you need to cash out some of a pension. Although it is worth speaking to a financial advisor before making any big decisions that could impact your future financial security.
If you aren’t able to pay the final lump sum when your interest only mortgage deal ends then it is not good news. The bank is expecting that money back and will take legal action to repossess the property if it looks like you aren’t taking any action to get them their cash.
It is not all doom and gloom however and repossession is often a last resort. You do have some options to explore before the bailiffs come knocking at your door.
As previously mentioned there are some actions you can take to try to raise the necessary funds to pay off your interest only mortgage lump sum if you don’t have the cash to hand.
This is a bit of a long shot but if you are unable to repay your mortgage you could speak to your mortgage lender and try to negotiate to extend the term of your mortgage. Although it is best not to get your hopes up too high with this as many banks will be reluctant to increase the term if it seems unlikely you are going to be able to raise the necessary funds before any term extension ends.
You could try to remortgage, either with your existing lender or a different one. Although getting a new mortgage with an interest only deal might be unlikely you could potentially switch to a repayment mortgage or a part repayment part interest only mortgage.
This will depend heavily on the affordability given your current circumstances, if you are coming up to retirement age or have already retired this could be a stumbling block as many peoples earnings take a hit when they move to solely relying on their pensions.
If you are above the age of 55 and struggling to get remortgage equity release could be an option. Often the value of the property will have increased substantially since the loan was initially taken leaving you with a significant portion of equity in the property.
If the value of the property has increased enough that you could unlock enough equity with an equity release loan to pay off the lump sum. Depending on the type of equity release you take you will either be left to pay the interest every month or in the case of a lifetime mortgage you wouldn’t need to pay anything.
If you don’t know which, if any of the options above are best for you then you should seek the counsel of someone qualified to provide mortgage advice such as a mortgage broker. Mortgage brokers who are experts in interest-only mortgages will be able to provide advice and work with you to to find the best way for you to cover the loan.
If you don’t qualify for or simply don’t like the idea of equity release then another option is to sell the property. Again as the property will have likely increased in value since you took out the initial mortgage you could sell the property and pay off the lump sum with the proceeds of the sale.
You can use any money left over after paying off the interest only lump sum to either move into rented accommodation or buy another property. If you have been living in a large property with excess space that you no longer need then you could use the opportunity to downsize into something more manageable, which could also lower some of your other bills such as electricity, gas and insurance.
You will need to bear in mind the amount of time that it takes to sell a property if choosing this option, the average time to sell a house in the UK is currently over 6 months and with the current economic climate and mortgage rates at a 14 year high you could find yourself on the market for much longer, especially if your house isn’t in immaculate condition or has underlying issues.
If this is the case then you might need to explore the next option.
If you decided to bury your head in the sand when the initial letters from the bank came through your door (you certainly wouldn’t be alone in this) and you don’t think there will be enough time to sell your house before the payment is due then there is an option that you could use to secure a fast sale.
You could use the services of a house buying company. These companies can complete a house purchase in a couple of weeks if necessary so even if you think you have left it too late to explore the sale option you might still have a chance.
The downside with this sort of service is that you have to compromise on the price, companies look to pay around 80% of a property’s market value.
Although if the options are either get 80% of the value of the property, which will hopefully give you enough funds to pay off the loan with some money left over, or hand the property over to the lender and have absolutely nothing to show for 20 years of home ownership then it seems like a good deal.
Most companies will give you a no obligations offer so even if you do have time to try and sell your house on the open market it is worth speaking to them so at least you have a back up if the worst comes to worst.
So unfortunately if you find yourself in the situation where your interest only mortgage term is soon to run out there is only one real option and that is to pay up. Which option is right for you will depend on your current circumstances, it is best to seek independent advice from a mortgage broker or financial advisor.
If your deadline for payment is soon and you need to get sell your house fast you can find our list of top rated cash house buying companies by clicking the button below.
If you find yourself unable to pay off the loan at the end of your interest only mortgage you risk your house being repossessed by your lender. You can explore other options such as negotiating a longer term with your lender, trying to switch to a repayment mortgage or if you are 55 or over exploring equity release options. If nothing else is possible selling the house before the repayment due date could be your only option.
You might be able to change from an interest-only mortgage to a repayment mortgage if you meet the eligibility criteria. Speak to a qualified mortgage broker to help you find your potential options.
You can always try speaking to your lender to see if you can extend the term of your interest-only mortgage although there is no guarantee that they will.
Your interest-only mortgage might have been mis sold if it was not make clear to you that you were only servicing the interest on the loan with your monthly payments or if you weren’t made aware that you would need to pay the full amount when the mortgage term was at an end. If you think you might have been mis sold, you could be due compensation so it is worth taking the time to see if you can find evidence of mis selling, any paperwork or other physical evidence would help you make a case. You can then write a letter of complaint to your lender or broker.
Cash House Buyer Guru
