Tips for Paying off Capital on Interest Only Mortgages

mortgage, capital, interest only, home-owners, endowment, repayments,

mortgage, capital, interest only, home-owners, endowment, repayments,

Interest Only mortgages have certainly seen the othe mortgage capital at the end of the term and there has been criticism of interest only mortgages throughout the mortgage industry. For those who currently have an interest only mortgage, it is wise to examine ways to help plan repayment strategies now so that you are not left with a huge debt in the future. This applies even if you have an Endowment or other repayment vehicle in place. In most instances there is no guarantee that the repayment vehicle, such as an Endowment will provide a sufficient amount to repay the mortgage in full – shortfalls are widespread and have been for many years. To ignore the situation may result in the lender dictating what happens at the end of your mortgage term instead of you as the home-owner who’s paid the mortgage and investment policy for many years. And for those who do not have a repayment strategy, you could say a review is ‘critical’.

What is an interest only mortgage?

An interest only mortgage means that your monthly repayment is only going towards repaying the interest on the capital you have borrowed, rather than repaying any of the capital itself. If your repayment strategy does not change you will still owe the total amount of the capital at the end of the mortgage term in a lump sum.

Repayments on an interest only mortgage are considerably cheaper, a factor which has attracted customers to this type of product in the past. It is particularly helpful to those starting out on the property ladder, or those with lower incomes.

Many home-owners take interest only mortgages initially intend to convert to repayment, but as circumstances have change and life continues, the conversion has not taken place. In the past, Lenders showed more tolerance to this than they do in this stricter economic climate. Continuing to ignore the position may leave a home-owner a ‘mortgage prisoner’ stuck with the current lender paying higher interest on the loan than they may have to if the mortgage was professionally reviewed and a solution met.

If your mortgage is interest only and you haven’t planned how to pay off the capital, don’t worry, help is at hand. Take action, even if that action is only to review the mortgage with a professional mortgage advisor who can at least discuss the options you have and the plans you can make. Don’t think it is too late, there are well known and established lenders that can provide a suitable solution that will meet your requirements, both immediate and long term, that are much better than having a huge balance to pay at the end of your mortgage term.

How can you pay off your interest only mortgage?

Switch to a repayment mortgage

Review your finances. See if you can make savings in other areas which will allow you to make higher monthly repayments. You can then switch to a repayment mortgage which starts to repay the capital as well as the interest on your mortgage. With a realistic plan for repayment you will guarantee you own your home at the end of the mortgage term. And don’t forget, if you convert to a repayment mortgage, the term of your mortgage does not have to be the same as it is currently. Extending your term will mean you pay more interest, but it may also mean the monthly repayments are affordable on a repayment basis and your mortgage balance is reducing month on month to zero at the end of the term. Did you know that lenders will allow a mortgage up to a maximum age of 75 for working individuals and 85 with suitable retirement income, so don’t think your mortgage has to end when you are 65 if you have income beyond that age.

Overpay each month

If you unable to switch to a repayment mortgage you have the option to overpay on your existing interest only mortgage which amounts to the same outcome – i.e. you start to pay back the capital. Overpayments may be subject to an Early Repayment Charge (ERC), so check with your lender first. For many mortgages, the lender allows repayment of up to 10% of the mortgage balance each year without paying the ERC. So if you owe £100,000 you can pay up to £10,000 per annum to reduce the balance – you must check your own paperwork or ask one of the team at Harvey Bowes to do it for you, so that you can make sure your terms and conditions allow what you want to achieve. Even a small overpayment each month is worthwhile as it reduces the balance nevertheless.

You might also be able to extend your mortgage term so you have more time to set up a repayment plan or gather to gather savings and funds.

Savings and investments

If you haven’t already, consider setting up a repayment vehicle. To do this you should talk to an Independent Financial Advisor (IFA) to get the advice you need. Your mortgage broker deals with the borrowing aspect of your finance and an IFA deals with the investing side of your finances.

At Harvey Bowes, we do not give advice on investment based repayment vehicles, can we can recommend a panel of IFA’s we have worked with for many years.

Downsize to a smaller home

If you do not have a repayment plan in place and you’re unable to switch to a repayment mortgage, you may have to consider downsizing to reduce your mortgage debt. If you’re approaching retirement age or your children have flown the nest, it may be a practical solution to help pay off your interest only mortgage.

Before doing anything, it’s best to speak to an advisor or lender about your situation. If you would like to know more about interest only mortgages or interested in switching to a repayment mortgage or any other aspect of this article, please call one of the team at Harvey Bowes or email howard@harveybowes.com

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: