What are your options with an interest-only mortgage?

Posted on

While interest-only mortgages have become less popular, millions of people have one and need a repayment strategy in place. If you do have an interest-only mortgage it’s important to review your plans as figures suggest almost half of borrowers will experience a shortfall.

According to the Financial Conduct Authority (FCA) over the next 30 years, 2.6 million interest-only mortgages will be due for repayment. While 90% have a repayment plan, the FCA estimate that 48% will not have enough money to pay off the loan. Half of the shortfalls are expected to be over £50,000, potentially leaving families struggling financially.

Why do you need a repayment plan with an interest-only mortgage?

As the name suggests, with an interest-only mortgage, you’re only serving the interest on the mortgage. This reduces monthly outgoings. However, you are not reducing the amount you borrowed. As a result, when the mortgage term ends, you still need to pay off the initial loan, and you need a plan for how this money will be repaid.

Even if you have a plan in place, you should regularly review this to make sure it remains on track. If investments have not performed as well as expected, for instance, you could face a shortfall. Knowing there is a potential gap sooner means you have more options to bridge it. If you reach the end of an interest-only mortgage term and can’t pay back the amount you owe, other assets may be at risk.

If you have an interest-only mortgage, there are many ways you can create a repayment plan to fit into your aspirations. Here are six options to consider.

1. An endowment policy

When you took out an interest-only mortgage, an endowment policy may have been offered alongside it. Taking out an endowment policy was particularly popular during the 90s.

It’s a type of investment product that covers a fixed period, in this case, linked to your mortgage term. It offers a way to invest to pay off the outstanding mortgage debt at the end of the term with a lump sum. However, as with all types of investments, returns from an endowment policy cannot be guaranteed. As a result, if you do have an endowment, it’s important you track performance and understand the risks associated. Investment performance that doesn’t meet your expectations could mean the lump sum won’t be large enough to pay off the loan.

2. Savings and investments

You don’t have to use an endowment policy to save or invest to pay off an interest-only mortgage. You can use other products to build up a lump sum that can then pay off the loan. This may include using ISAs or an investment portfolio.

If you choose to save, your money will earn interest. However, interest rates are low and it’s likely your savings will lose value in real terms once inflation is calculated. Investing could help your money outpace inflation, but it does come with investment risk and the value of your assets can fall. As a general rule, investing should be considered for goals that are more than five years away.

You may also want to consider whether pension investments could be used to pay off your mortgage once you reach retirement age.

If you’d like to discuss how your assets could be used at the end of an interest-only mortgage or which investments are appropriate for your goals, please get in touch.

3. Start overpaying your mortgage

If you’re in a financial position to make additional mortgage payments, this can help reduce the loan amount. Overpayments will go towards reducing the debt, rather than interest. Therefore, regular overpayments, or a one-off lump sum, can help ensure you’re on track to pay off your mortgage.

Make sure you check the terms of your mortgage before making an overpayment. You can usually pay off 10% of the outstanding amount without incurring any fees. However, this isn’t always the case.

4. Taking out another interest-only mortgage or extend the term

If you need more time to repay the loan, using another interest-only mortgage or extending the term may be an option. You will need to continue making interest payments if you choose this solution. As a result, it will end up costing you more.

You will need to apply for a new mortgage, this will include the provider reviewing your ability to make repayments. You should also ensure you have a long-term plan for paying off the loan too.

If you’re nearing retirement and an interest-only mortgage is coming to an end, one option to explore is a retirement interest-only mortgage. These mortgages don’t have a term, but will run throughout your life or until you sell your home. It can be a useful option if you don’t have any way of repaying the loan. However, it means throughout retirement you will need to continue making interest repayments, which could increase, so this needs to be factored into your retirement plan.

5. Switch to a repayment mortgage

If you’re in a position to do so, switching to a repayment mortgage can make sense.

This is where you’d pay off some of the amount borrowed along with the interest accrued each month. Assuming you keep up with mortgage repayments, you’d pay off the loan at the end of the mortgage term. However, your monthly payments will rise as a result. You should ensure you can meet this financial commitment. Mortgage lenders will also check you’re in a position to meet payments before they approve your application for a repayment mortgage.

6. Selling your home

Finally, you can sell your home to pay off any outstanding debt.

The main risk is that your home is worth less now than when you bought it, leaving a shortfall. However, despite short-term dips, house prices have climbed over the last few decades. So, if you’ve held an interest-only mortgage for several years, you’ll probably benefit from rising house prices. As a result, you should be able to sell your house and still have some money left over after repaying the debt. This could be used to purchase another home or act as a deposit.

Of course, the drawback here is that you’ll have to move. For some, this can make sense. But, for others, selling their home will be the last resort. If moving home doesn’t fit in with your plan, an alternative may offer a solution.

If you have an interest-only mortgage or are considering taking one out, a repayment plan is essential. Please contact us to discuss your plans and the options available with one of our team.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

 

We aim to keep our clients up to date on interesting and relevant financial news.

You can sign-up to receive our monthly newsletter by email, even if you’re not yet a client. Sign-up using the form below.

Client testimonials

I have always found Black Swan to be caring and understanding of my quirky lifestyle. I always feel they try to get me the best returns while respecting my current needs.

Sally Muir

A client since 2011

We would be very happy to recommend the support and service we receive.

Valerie Locks

A client since 2010

I have always been completely useless regarding finance - thankfully our financial adviser is not! I've retired with far more than I ever expected and investments continue to grow safely. So - thank you!

Bernadette Jane Warner

A client since 2000

Very happy with the professional service I have received and feel a lot happier now with my finances put in order.

Martin Field

A client since 2011

Julie Cooper was recommended to me by a work colleague. She has been very helpful, professional and has explained everything well. I would definitely recommend her services to anyone else who are interested in a financial review.

Steven Rooke

A client since 2018

…Service has been first class.

Hugh Fells

A client since 2012

My face to face meetings with Rob Young and Jessica Lyons have always been very open and understandable. My questions have been answered clearly and I have left feeling that my financial matters are in good hands.

Sandra Jack

A client since 2000

[A] safe pair of hands in a complex financial world.

Gary Middlehurst

A client since 2003

A reliable company with good communication skills and good knowledge of the financial markets.

Alan Evetts

A client since 2014

Maureen Pembridge is a long-time trusted advisor to our family. The market might fluctuate but her attention to detail is consistent.

Linda Burnard

A client since 2000

I am pleased to recommend Julie as a trustworthy financial advisor. She explains financial jargon in plain language, and always listens carefully to my particular financial needs and has helped me make the best of my savings.

Carolann Samuels

A client since 2010

I have always been satisfied with the way that Black Swan has handled my account. And I have always found the staff very helpful whenever I need to call the office.

Robert Anthony Matthews

A client since 2012

An excellent personal service from a person I know and trust.

Michael Dalton

A client since 2010

I am getting a very good services from Black Swan, they have got my investments sorted out which was in a bit of a mess.

Roy Jakens

A client since 2012

A good, efficient team providing clear ideas to shape a winning strategy.

Adrian Michael Levenstein

A client since 2011

Black Swan is a company to be trusted, with friendly staff and professional advisors.

David Brian Jennings

A client since 2017

I have been with Black Swan for many years. I have never wished to change anything. They give a good straight forward service.

Martin Barrett Brooks

A client since 2010

Andy Peters has been invaluable in firstly combining several pension pots and then giving excellent investment advice. It has given us a great deal of comfort to know that our financial affairs are in such good hands.

James Guillum Scott

A client since 2014

I find my financial advisor easy to talk to and feel that she understands my lifestyle. She is always available for help when I need her and explains in words that I can understand.

Margaret Ena Glasgow

A client since 2000

Andy is a first rate Director, excellent communicator and leader.

Ross Perry

A client since

Black Swan Financial Planning and Andrew in particular, are very clever at working out how risk averse we are, and coming up with solutions that we feel comfortable with. We are happy in the knowledge that we can continue to enjoy a comfortable retirement. Andrew Peters is a very, very friendly person who is great to chat to and easy to deal with. He explains things very clearly in layman’s terms, and if we still don’t understand, he explains it until we do!

Alan & Jane Dyer

Clients since 2012

We have always found Rob [Young] to be very approachable and knowledgeable. We have every confidence in the advice given and feel comfortable with the decisions we’ve made. There are certain opportunities that we wouldn’t have known about if Rob hadn’t brought them to light, which makes the advice good value for money as far as we’re concerned.

Peter & Pauline O’Halloran

Clients since 2013

Rob [Young] is extremely knowledgeable. I knew nothing about the different types of trusts which will not only secure my income in retirement, but also leave a legacy for my children. I’m glad that I sought his advice when I did.

Sarah Wilson

A client since 2015

I am extremely happy with the service afforded to me by the company and my adviser Julie Cooper.

Geoff Coxell

A client since 2010

My wife and myself have been dealing with Black Swan for a number of years. We have met with different representatives from the company over the years and have found all very helpful in their own way. We met with James [Anderson] a few years ago and found him very helpful and knowledgeable. He keeps in contact with us on a regular basis. We find the Company information very helpful and we feel very secure with our finances.

Andrew Kirchen

A client since 2015

I have always found my adviser to be easy to contact, very professional in his approach, yet friendly and understanding. I have a sense of an experienced company behind him, really on the ball financially and with good standards.

B McBean

A client since 2011

Partner with the most reliable and experienced team of advisers

Enter your details & we'll be in touch to discuss your needs.
Alternatively, contact us directly and speak to a member of the team.

    Subscribe to our newsletter