Around a fifth of outstanding residential mortgages are interest only, according to the Council of Mortgage Lenders, with many borrowers having no plans to repay them. The problem is that many borrowers took out interest-only mortgages at much higher loan-to-value ratios than would now be granted, and without thinking as to how they would pay them off.
But while there has been talk of a ticking time bomb, there is action borrowers can take if they are on an interest-only mortgage and are worried:
- If there is a repayment strategy, check it is on target to pay off the capital at the end of the mortgage term.
- If there is no repayment strategy, you need to start thinking about how you can pay the capital back. Seek independent advice.
- Most lenders will let you overpay by up to 10 per cent of the mortgage balance per month without penalty so consider setting up a direct debit to do this and chip away at the balance.
- Speak to your lender to see whether it will consider extending the term of the mortgage, giving you longer to pay it back. However, you will need to evidence that you can afford to pay the mortgage in retirement.
- If your lender won’t let you extend the mortgage term, seek independent advice to see whether another lender will do so. However, another lender will only do this if the mortgage is affordable and you have a repayment strategy that it is comfortable with.
- If you do not have the ability to pay back the mortgage and would prefer to stay in the property rather than selling up and downsizing, equity release may be an option. Again, independent advice is crucial.