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Interest only – not so much of a ticking time bomb

03.05.2013

The Financial Conduct Authority, the new regulator, warned this week that almost half of those with interest-only mortgages may not have enough money to pay off their loan when it matures. This suggests some 1.3 million homeowners face a shortfall.

However, for many this isn’t really a time bomb as there is still time to do something about it. There is no need to panic but there is a need to take action. Look at your situation and see whether the numbers add up. If they don’t, it’s time to do something about it and there might be several options open to you:

* Switch to a repayment deal: This might mean a significant jump in monthly payments if you don’t have many years left on your mortgage but it would guarantee clearing the capital by the end of the term if you could afford to do this.

* Overpay: Most lenders will let you overpay by up to 10 per cent of the mortgage amount per annum so you could start chipping away at the capital.

* Extend your mortgage term: If you have to repay the capital on  your mortgage in say five years’ time and are unable to raise the required funds in time, one option may be to remortgage and extend the term. However, this may be tricky if you are nearing retirement as a number of lenders don’t like to lend into retirement. Speak to us as to which lenders are more flexible than others when it comes to age.

* Save or invest more: You might not wish to throw good money after bad if your endowment is underperforming but there might be other investments and savings worth considering.

* Downsize: Sell up and move to a smaller property, freeing up capital to clear the outstanding balance on your mortgage.

We have been inundated with requests from borrowers in the past few months for interest-only mortgages, as mainstream lenders further tighten their criteria. Interest only is turning into a niche product. It may still be possible to borrow on interest-only terms via the high-street banks but much trickier than in the past. The majority of borrowers who need interest only will now have to look at the private banks – if they meet their criteria. Clients must be wealthy or on track to become wealthy at some point.

As long as a client has a considered repayment strategy in place that they can comfortably meet, interest only is arguably no riskier than a repayment mortgage. If the borrower has a remuneration structure which has a significant element paid in annual bonuses or stock and share allocations, or there is a realistic and viable anticipation of a future capital event, or they will sell a property to pay off the capital, then I would argue that they should be able to borrow on an interest-only basis.

For example, if a client who relies heavily on bonuses for a significant proportion – perhaps the majority – of his income, can’t borrow against all of it, he will be severely penalised. A high-street lender may lend against no more than 50 per cent of the bonus, meaning a large and valid part of the borrower’s annual income would be ignored. If the client earns £100,000 basic and £200,000 bonus, he might be able to borrow four times income or £800,000, if all his base salary were taken into account and half his bonus. But there is an annual £100,000 that is not being considered.

In theory, this forgotten £100,000 per annum could enable him to pay off the mortgage in eight to ten years. What would be the point of a capital and interest mortgage over 25 years? Luckily for this client, he may qualify for private banking and therefore get his interest-only loan. Not everyone will be so lucky.

Contact Anderson  Harris to discuss your interest-only requirements.

Jonathan Harris
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Jonathan Harris
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