How Far are You with Repaying Your Interest-Only Loan?
Are you struggling to repay your Interest-Only Mortgage?
According to the FCA, or the Financial Conduct Authority, over 40 000 interest-only mortgages will mature annually until 2032. However, many borrowers aren’t equipped with the right repayment strategy or plan. The results being that numerous people are struggling to pay off their debt.
With that in mind, it’s good to know that there are options to choose from to get yourself out of a sticky situation. One of these options is equity release.
What Exactly is An Interest-Only Mortgage?
These types of mortgages are great for borrowing money with as few monthly repayments as possible. Why? Because you only have to repay the interest monthly and not the loan. The capital is solely due at the end of your mortgage period.
The repayments that you’ll have to pay monthly are less than repayment mortgages.
DISCOVER more about: Interest-Only Lifetime Mortgages
Can’t Repay Your Interest-Only Mortgage?
If you don’t have a plan in place, equity release can be your financial lifeline. In 2020 alone, roughly 27% of equity release customers used their equity to pay off existing mortgages.
Best of all!
If you’re considering taking out a lifetime mortgage, you won’t have to worry about affordability assessments. That’s one reason for lifetime mortgage popularity. And, if you’re an older homeowner, this can be an excellent option for you, considering that your pension income might stop you from being approved.
Lifetime mortgages only have to be repaid at the end of the loan term, plus any interest accrued during the loan period. The end of the mortgage is when the primary homeowner dies or goes into permanent care. The mortgage provider will use money from the property’s sale to repay the loan.
In the UK, property prices are rising. Alongside that comes an increase of stored up equity within homes. For homeowners who are 55 years or older, the total amassed equity in 2020 was around £591 billion. Equity Release is significant because you can access your funds tied to your property at the same time as you live in it.
You don’t have to downsize or sell your property to get extra funds when you need them. You can simply take out an equity release loan, or alternatively, an interest-only mortgage for an excellent repayment plan option.
Lifetime mortgages don’t require repayments if you don’t want to make them. These mortgages come with many safeguards for you as a customer, and you’ll most certainly benefit from the massive annual property value increase.
You should try the Home Equity Release Calculator to see your financial potential.
As mentioned above, lifetime mortgages don’t require you to make repayments. The loan, plus interest, is repaid from the sale of your home when you die or move into permanent care. This means that there’s no risk of repossession. However, the value of your estate might be affected, as well as your means-tested1 benefits. So, just remember to consider that.
Retirement Interest-Only Mortgages (RIOMs)
So, the news just gets better and better. Not only can you choose to take out an interest-only mortgage, but if you’re older, you can also select a retirement interest-only mortgage or RIOM. Unlike lifetime mortgages, RIOMs require you to make interest repayments. The capital repayment is made just like lifetime mortgages when the owner dies or needs permanent health care.
Learn More: Equity Release Alternatives
Why Should You Consider an Equity Release?
There are so many myths2 when it comes to equity release. Thanks to absurd equity practices during the 1990s, people are skeptical about it. However, modern equity release as we know it today is much more flexible, safe, and customers now have the option to ringfence a portion of their equity for an inheritance. Customers can also pay off interest monthly or even make voluntary repayments without extra costs.
The old myth is BUSTED!
The equity release figures keep improving. According to the ERC (the Equity Release Council), equity release product options have increased by a whopping 30% since 2007.
Here are the: Equity Release Myths
Get Professional Equity Release Advice ASAP
Most equity release providers require you to ask professional advice before taking out an equity release plan, especially when you’re considering a lifetime mortgage. They should provide you with a personalised plan of your loan, highlighting information like its impact against your estimated property price increases. They’ll also go through other possible ways to repay your loan.
Let’s look at a real-life example.
Someone who’s aged 65 with an interest-only mortgage that’s ending soon– what should they do now?
Well, let’s suppose you still owe £112,000, but you don’t want to sell your house to pay it off yet, and you want to live in your home. You’re earning a part-time annual income of £23,000 (or £1,560/month), and you’re receiving a private pension3 of £550/month plus £700/month state pension. Your interest-only mortgage was coming to an end in November 2019, and your property is worth £190,000.
So, what are your options?
Until recently, they would’ve only had the option of downsizing, selling or taking out an equity release plan to pay off the mortgage4, the remaining £112,000.
You have another way to repay your mortgage: later-life lending options like retirement interest-only mortgages or other repayment mortgages for the elderly. The FCA5 has relaxed its rules slightly in recent years.
If your current lender isn’t allowing you to extend your mortgage, consider speaking to a specialist lender who can offer you a conventional residential mortgage under its requirements.
Why don’t you check our Retirement Mortgage Calculator?
Time is of The Essence When Repaying Your Mortgage!
Why do we say that? It’s essential to look at your options so that you can repay your mortgage. The longer you let it be, the fewer options you’ll have to fix it. Going forward without a plan is very risky, and we don’t advise that. You’ll risk having to possibly sell your house or have it repossessed if you can’t repay your mortgage.
The FCA, which regulates lenders, will explain why you should act fast and speak with your provider, even if you might think it’s already too late. Things can get ugly.
2 Points You Should Know:
- A lender or provider isn’t allowed to cancel your mortgage before its due date, even if you tell them that you can’t repay it.
- A lender also can’t make you switch to a repayment mortgage you can’t afford.
3 examples of what won’t work if you can’t repay your mortgage:
- You won’t be able to carry on making monthly repayments after the mortgage period is over. Even if you can afford to do so, lenders prefer customers to get an alternative way to repay it: selling your house, etc.
- You won’t be able to get another interest-only mortgage at the end of your unpaid mortgage. Instead, consider taking out an equity release plan.
- Don’t think you’ll get out of repaying by telling your provider the mortgage was mis-sold. They’ll let you know that you should’ve done your research and spoken to a financial adviser before taking out the plan.
So, what can be done?
One option is to switch to a repayment mortgage with your current provider. Another option is to keep part of your mortgage interest-only and switch the other part to repayment. Some people choose to pay more into their savings every month, but it’s riskier.
8 Alternative Repayment Vehicles
Here’s a list of 8 alternative mortgage repayment methods you can count on:
- You can use cash that you saved in a savings account or ISA6
- Stocks and shares ISAs
- Investment bonds
- Unit trusts
- Regular savings plans
- Any other properties or assets
Once you’ve chosen the repayment option that’s right for you, your lender/provider will give it an assessment, and you’ll be able to repay your mortgage successfully.
To ensure that you don’t end up in a pickle, it’s good to plan and assess how much money you’ll have to save:
Work Out How Much You Need to Save
Some calculators can help you work out how much you’ll need to save. They’ll require you to input:
- The mortgage amount
- The loan period
- Interest rates (input a high and low percentage so you can see the best and worst result)
Investment value rises and falls continuously. So, you can lose all your money before you can pay off your mortgage. A good financial adviser will frequently get you to review your investments to make sure you’re still in the green.
If you’ve reviewed your investment and it’s no longer in the green, you should move to a safer cash-based financial product as your mortgage term comes to an end. This will provide you with much-needed peace of mind.
Got Questions? Check These First
What Happens If I Can't Pay Off My Mortgage?
Your lender will submit a delinquency claim on your credit report. That will stay there for seven years. You’ll have to come up with some way to repay it.
Can Mortgage Debt Be Written Off?
I mean, you can always ask. However, they probably won’t agree with that. But, maybe if your situation can improve, some lenders might oblige.
Some lenders may agree to write off part of the loan if you can repay the rest with a lump sum payment or regular repayments.
What Happens After 7 Years Of Unpaid Debt?
The unpaid debt will drop off an individual’s credit report after seven years, meaning late payments associated with the outstanding loan won’t affect your credit score anymore.
They can take you to court, but the case can be thrown out if you show them that the debt is time-barred.
Can You Go To Jail For Not Paying Mortgage?
You can’t go to jail for an unpaid loan. If you get sued for outstanding debt, you’ll simply go to court.
It’s a sad situation if the day comes when you can’t repay your loan. However, there are ways to prevent that from happening. If you’re already floating in the unpaid loan boat, then there are ways of combatting the tidal waves before you drown.
After reading our 8 alternative repayment vehicles, you should be bound for the harbour of being debt-free in no time. Check out our equity release calculator to see how much cash is tied in your home!