Interest-Only Mortgage Expiring

Interest-Only Mortgage Expiring 

Mark Thompson talks us through what happens when interest only mortgages expire.

What happens when you come to the end of an interest only mortgage?

As an equity release specialist, this is close to my heart. I get a lot of enquiries from people whose interest only mortgages are coming to an end.

The difference between an interest only mortgage and a capital repayment deal is that with interest only, people only ever pay the interest off – not the original sum they borrowed.

So if they borrowed £100,000, after 20 years they still owe £100,000 because they only pay the interest. With a capital repayment mortgage they would have paid the £100,000 back after 20 years. They’ve paid interest and some of the capital each time they make a payment.

At the end of an interest only mortgage, you still have the debt you originally took out. After the 25 or 30 year term, the lender will ask for that money back. But in a lot of cases, clients haven’t got the money to pay it off.

They might have to sell their home and pay it off that way. Or, if they speak to an equity release advisor, they might decide to replace the interest only mortgage with a lifetime mortgage.

How long can you stay on an interest only mortgage? Is it possible to extend it?

Generally, when you take any mortgage out you have a term – it might be 15, 20 or 25 years. That’s how long you have before the provider wants the money back.

At the end, if you’re not in a position to pay it back straight away, or you want to look at your options, some lenders will allow an extension.

Even the most draconian providers would give you a few months to sort it out. I’ve had a client this week that has had an extension of a year, because they were really stressed about it. That then enables me to help them buy another property using equity release.

Lenders never want to repossess a property, especially for an older client who can carry on making the payments. But they do have the right to say no and ask for the money owed.

How do you release equity from an interest only mortgage?

Let’s look at why somebody takes an interest only mortgage. If you’re in your 30s, why take an interest only mortgage over a capital repayment deal, where after 25 years you would own your home outright?

People do it because their monthly payments are cheaper. If you’re just paying the interest back and not the capital, your payments are lower. You would hope to have some equity after 25 years, because the property should be worth more than you paid for it although this can never be guaranteed of course.

You could remortgage to pay off the interest only mortgage. That might be with a standard mortgage, if you can afford it and you’re still earning. If you’re in later life and you don’t have the income, then often a lifetime mortgage is required to pay that off.

That is still very common. A lot of people need equity release to pay off their interest only mortgage and stay in their homes.

Do you ever own the property with an interest only mortgage?

Yes, you always own the property – you just happen to have a mortgage on it. With any mortgage, you still own the property. The mortgage is a loan secured on property.

As long as you pay the mortgage you’re okay. If you don’t, the lender has the right to recover the funds owed by taking the property – because you put it up as security. Interest only mortgages are the same as standard mortgages that way. You own the property, you just have it mortgaged.

Is it better to overpay on an interest only or a repayment mortgage?

This is very complex. It depends on your personal circumstances and what you’re trying to achieve. Some people want to become mortgage free, so they look to make overpayments on either interest only or repayment mortgages.

By paying off your mortgage early, you’ve saved interest. But will it compromise your lifestyle and living standards? That’s something for the client to decide. The argument is you’ll always have paid it off by the end of the term if it’s a capital repayment deal.

In terms of overpaying on an interest only, that’s a different kettle of fish altogether. If you don’t overpay, you’re not actually paying any of your capital back. With that £100,000 example, I could pay interest for 20 or 25 years, but still owe the full £100,000 at the end.

That might seem OK when you’re 50, but when you’re approaching 70 and your mortgage comes to an end, where are you going to get £100,000 from?

In my experience, people take mortgages out and don’t have any more contact or advice. They carry on paying the mortgage with their head in the sand. Then the bank knocks on the door and the mortgage is up in six months ‘ time – they want the money back.

If you haven’t overpaid, you might need to look at equity release to pay it off. And, as we’ve covered in other podcasts, you can’t always borrow enough.

I’ve got several clients at the moment that are having to move. They’re still getting equity but they can’t get enough on their existing properties to pay off their interest only mortgage. Had somebody said to them ten years ago that it would be a good idea to overpay a bit, they might not have ended up in that position.

Can I sell a property with an interest only mortgage?

Yes, you can. You just have to pay off any outstanding mortgages secured against your property.

How do I get out of my interest only mortgage?

A lot of people are getting out of them, but they are swapping one mortgage for another. A lifetime mortgage is an interest only mortgage although unlike a standard interest only mortgage they don’t have to be repaid until the last party dies or goes into long term care and they don’t have to make interest payments along the way. The interest charges are added to the mortgage and payable when the mortgage comes to an end.

A lot of people take a lifetime mortgage to pay off an interest only mortgage so they can stay where they are. But essentially, the only way out is paying it off.

How do you calculate the interest on a mortgage?

It’s generally straightforward, but you’ve got to make sure you’ve got the right interest rate. There are different acronyms – such as the annual payment rate (APR) or equivalent rate of interest.

If you’ve got a £100,000 mortgage and the annual equivalent rate of interest is 10%, then over a year you’d have to pay back £10,000. Split that down into 12 monthly payments, that’s what you’d have to pay: £10,000 is divided by 12 which is around £830.

How can I get help with my interest only mortgage? Can I get help from the government?

I’m not a specialist on schemes, but the government recently had meetings with the mortgage lenders. A lot of people have high mortgages that they’re struggling to afford on a capital repayment basis now.

As we’ve said, an interest only mortgage has cheaper payments per month – although not over the term, because you’re not paying off the capital. But as a temporary solution to somebody being in trouble, having the ability to transfer it from a capital repayment to an interest only mortgage for a period of time might enable them to sustain their payments.

They can then go back onto a capital repayment at some stage in the future, when rates are more attractive or their situation is better.

I think that’s what the question’s driving at, but I’m not aware of any government assistance to help you pay off an interest only mortgage. Certainly there was no government assistance to help with capital repayment. It’s a guideline they asked the lenders to follow.

Is an interest only mortgage a good idea? What are the advantages and disadvantages?

Again, it depends on your personal circumstance. The majority of interest only mortgages in this country are taken out by landlords, as Buy to Let mortgages.

Obviously if a landlord is buying a property to let out, high capital repayment mortgage payments will dramatically reduce his profitability. If he’s taken out an interest only mortgage, he’s only paying off the interest and therefore his profit will be higher on a monthly basis.

For some landlords that is a good idea, a lot like to do it that way. It’s not an issue for them. When it’s time to pay off that mortgage, they will sell the rental property.  They’re not living in the house. It’s easy to sell.

But it’s different if you’re living in the house and it’s your main home. An interest only mortgage may have been a good idea at the time of taking it out, but may not be in later life.

The main advantage of an interest only mortgage is that it has cheaper repayments. It’s not cheaper in terms of the overall interest paid. That’s the critical thing – with mortgages, we look at the overall cost over the term.

Interest only could cost you a lot more money because you’re paying all of the interest over the whole term. You never reduce the capital on which you pay the interest. It may be cheaper upfront but over the term, it might not be the best thing to do.

Someone may be able to borrow slightly more on an interest only basis because their payments will be lower. But it really is dependent on the person as to whether the decision is good or bad. Any advantages they bring will be led by their personal circumstances.

Can I get an interest only mortgage at age 60?

As long as you can afford the payments on it, then yes, you can. With any mortgage, lenders have requirements on how long to lend for. Having a shorter term can impact on the amount you pay on an interest only mortgage.

Lenders are all different. Some don’t do interest only at all.  By the way, all lifetime mortgages are technically interest only, at a fixed rate of interest for life.

Will the lender repossess my home? What are my options if I can’t repay the capital of an interest only mortgage?

I’ve been in property all my working life and I’ve been involved with many repossessions. In the area where I live, there were mammoth amounts of repossessions in the 1980s. So, when people ask if a lender will repossess my home, I have a very straightforward answer: yes, they will.

If you do not keep up your repayments, they will repossess. There’s a lot of talk about trying to suppress repossessions, but these are banks – they lend money to make money. So if you do not pay it back, they will repossess. Maybe not today or tomorrow, but after a certain period they will.

It’s a bit like a landlord evicting a tenant. They might get away with it for a few weeks or months because it takes time, but sooner or later a landlord will repossess the house if a tenant isn’t paying the rent.

If you can’t repay the capital of an interest only mortgage, your options are standard borrowing, a general loan, selling the house or a lifetime mortgage. Again, equity release is one of the biggest solutions out there. It doesn’t have to be the right one or the only one but it is very common.

What else do we need to know about equity release and interest only mortgages expiring?

The biggest mistake people make is not reviewing their finances enough. Often they take a mortgage out and seem to forget about it until something slaps them in the face.

Consumer Duty rules came in recently from the Financial Conduct Authority, which stipulate that advisers must keep in contact with their clients. It should be an ongoing relationship rather than just a one hit wonder.

I think that’s excellent. It’s common sense, and some of us do it, some haven’t. Keeping in contact with clients will make them more aware of their financial position and see if any options out there could make it easier.

To customers I say, don’t bury your head in the sand. If your mortgage is going to end in three or four years, look at it now. Speak to an advisor. We don’t charge just to chat with you.

I speak to hundreds of people each year that don’t take out a lifetime mortgage. I’m happy to give them free advice and direction. This week I’ve had a text from someone I talked to two years ago that is now ready to proceed.

I spoke to a couple recently who were absolutely distraught – they were getting pressured by the bank and nobody had given them proper advice. They were referred to me and I had a good, long conversation with them. It was as if I lifted the weight of the world off their shoulders.

We could steer them in the right direction, and now they are going to take equity release on a purchase in the New Year. They got their interest only mortgage extended. So now their Christmas will be fantastic. They thought they would have to move out by Christmas but the bank is happy with their plan and has extended it for a year.

It upsets me to think there are thousands of people out there worrying about this. Pick up the phone, have a chat, just get an understanding of the options. Once you know your options, it will make life so much easier.

Don’t assume it will just all magically turn around. Address your financial issues sooner rather than later.

A lifetime mortgage is not suitable for everyone and may affect your entitlement to means tested benefits, so it is important to seek financial advice before taking any action.  If you are considering releasing equity from your home, you should consider all options available before equity release.  

The interest that may be accrued over the long term with a Lifetime Mortgage, may mean it is not the cheapest solution.  As interest is charged on both the original loan and the interest that has been added, the amount you owe will increase over time, reducing the equity left in your home and the value of any inheritance, potentially to nothing.

Although the final decision is yours, you are encouraged to discuss your plans with your family and beneficiaries, as a Lifetime Mortgage could have an impact on any potential inheritance. We would also encourage you to invite them to join any meetings with your Financial Adviser so they can ask questions and join in the decision, as we believe it is better to discuss your decision with them before you go ahead.