Homeowners struggling with interest-only mortgage repayment deadlines are having to sell their homes to pay off debts, new research from equity release referral service Key Partnerships shows*.
Council of Mortgage Lenders data shows the number of outstanding interest-only mortgages has fallen by more than a third since 2012 – but what is not evident for maturing loans is how they are actually being repaid. The evidence points to the fact that far too many are having to sell their homes to clear the outstanding debt, Key warns.
Its study found that 43% of estate agents have seen a rise in sales from customers facing interest-only mortgage repayment issues over the past two years.
According to industry data, around 10,000 borrowers a year between now and 2020 will come to the end of interest-only loans, with either a projected shortfall from their repayment strategy or no strategy at all. Key’s research found that older homeowners looking to downsize to release cash are particularly affected, with 73% of them still paying off mortgages.
So what should you do if you find yourself in this position? We spoke to the experts at Mortgage Advice Bureau, who said you should speak to your lender or a mortgage broker to review your options as soon as possible.
Brian Murphy, head of lending at Mortgage Advice Bureau, says: “A number of mortgage lenders, in particular the smaller regional building societies, are now much more accommodating in offering interest-only mortgage products to borrowers in later life, in some cases way beyond normal retirement age, subject to the borrower being able to meet affordability criteria, be that from earned or retirement income or both.
“Also, depending on your age and circumstances, your existing lender may consider allowing you to convert all or part of your mortgage to capital and interest repayment and/or extend the term.
“For the proportion of customers who do not have sufficient time left on their term or the financial resources to cover the capital repayment, lenders are becoming increasingly committed to working with customers to find a repayment option, so it is worth speaking to a broker to find the best option for your circumstances.”
Interest-only mortgages have become less common since the financial crisis, with fewer lenders offering them. If you do have one, though, Brian suggests switching to a repayment mortgage, so you can begin to pay off the capital, as well as the interest.
He explains: “You will need to demonstrate to the lender how you are planning to repay the capital amount borrowed at the end of the term. It is your responsibility and not your lender’s to ensure a credible repayment vehicle is in place; this may include an investment product (ISA/unit trust), savings or a combination of both.
“It’s not wise to rely solely on inheritance or that your property will rise in value enough to enable you to downsize in order to pay off the mortgage. Your lender will check at least once during your mortgage term that your repayment plan is on track to cover your mortgage.”
If you’re currently looking to take out a mortgage, perhaps for a property to let, you don’t necessarily have to rule out an interest-only loan. The main thing is to do your research first.
As Rupert Swetman, head of mortgages at Which? Mortgage Advisers, says: “It is vitally important to discuss your options with a mortgage adviser, especially when you are considering an interest-only mortgage. A broker will be able to establish if this strategy is the most suitable for your scenario and inform you of all the criteria and risks. For some individual’s circumstances, it might be the most suitable type of repayment method. Having said that, it is important that you have an idea of all the options available to you.”
*A sample of 104 estate agents were polled online by independent company Pollright in April 2017.