Here’s What You Need to Do If You Can’t 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. So, many people are struggling to pay off their debt.
Now, with that in mind, it’s good to know what other options you have to choose from before you get yourself into such a bad situation. One of these options is equity release.
What’s An Interest-Only Mortgage Exactly?
These types of mortgages are great for borrowing money with as little 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, for example.
Best of all.
You only need to prove you’ll be able to repay the monthly interest to apply for this mortgage. It’s more comfortable and more affordable to use for this type of mortgage than the other options on the market.
Is Equity Release Beneficial If I Can’t Repay My Interest-Only Mortgage?
If you don’t have a plan in place, equity release can be your financial lifeline, in a way. Roughly 27% of equity release customers use their equity to pay off existing mortgages or the figure in 2020.
Best of all…
If you’re considering taking out a lifetime mortgage, you won’t have to worry about affordability assessments. That’s the reason for lifetime mortgage popularity, it seems. And, if you’re an older homeowner, this can be an excellent option for you, seeing as your pension income might stop you from being approved.
Let me tell you something else…
Lifetime mortgages only have to be repaid at the end of the loan term, plus any interest that accrued during the loan period. The end of the mortgage is when the primary homeowner dies or goes into permanent health care. The mortgage provider will use money from the property’s sale to repay the loan.
Why Should I Consider Equity Release?
In the UK, house prices are rising. With that rising comes a rising of stored up equity within homes as well. For homeowners who are 55 years or older, the total amassed equity was around £591 billion in 2020 alone. Equity is significant because you can access your funds locked up in your property, but you still live in your property at the same time!
You don’t have to downsize or sell your property to get extra funds when you need it. You can simply take out an equity release loan or an interest-only mortgage for an excellent repayment plan option.
Best of all:
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 property value increase in a few years.
You should try the Equity Release Calculator to see your financial potential!
As mentioned above, lifetime mortgages don’t require you to make repayments. This means that there’s no risk of repossession. However, the value of your estate might be affected, as well as your means-tested benefits. So, just remember to consider that.
What About 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 RIOM1. 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.
Equity Release’s Ever-Changing!
There are so many myths when it comes to equity release, as you might know. Thanks to absurd equity practices during the 1990s, people are sceptical about it. However, modern equity release as we know it today is much more flexible, safer, 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!
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 example or outline of your loan, its impact etc., against 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. You want to live in your home. Let’s suppose you’re earning a part-time annual income of £23 000 (or (£1,560/month) and you’re receiving a private pension of £550/month plus £700/month state pension. Your interest-only mortgage was coming to an end in November 2019. Your property is worth £190,000.
So, what are your options?
Until recently, they would’ve only had the options of downsizing, selling or taking out an equity release plan to pay off the mortgage, the remaining £112 000.
Today, although you can still choose one of those options, you now have another way to repay your mortgage: later-life lending options like retirement interest-only mortgages or other repayment mortgages for the elderly. The FCA has relaxed their rules a bit 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 take out a conventional residential mortgage under its requirements.
You Need to Work Fast if You’re Struggling to Repay 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.
So, let’s dive deeper.
The FCA, which controls 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, but consider this:
- 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.
Here are some 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 only switch part of it to repayment. Some people choose to pay more into their savings every month, but it’s riskier.
Let’s look at some more repayment options out there.
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 ISA
- Stocks and shares ISAs
- Investment bonds
- Unit trusts
- Regular savings plans
- Any other properties or assets
After your lender or provider assessed your chosen vehicle, you’ll be able to repay your mortgage successfully.
However, 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 to 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)
You must remember this…
Investment value rises and falls continuously. So, you can lose all your money before you can pay off your mortgage. So, a financial adviser usually tells you to review your investments very often to make sure you’re still in the green.
Once 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 is so you can have peace of mind.
How are other people handling this situation of being unable to repay their interest-only mortgages?
You’re Not Alone…
Let’s start with Mr A. Let’s just call him that. He decided to convert half of his mortgage to a repayment mortgage which was affordable to him. The other half of his mortgage he chose to repay using a tax-free lump-sum from his pension. The lump-sum was drawn at the end of his mortgage.
Mr and Mrs B took out a massive car loan that will be active for three more years. They started to overpay their mortgage at the end of their loan by around £200/month. This increased the equity in their house by enough that when 2028 comes around and their mortgage ends, they should be able to apply for a lifetime mortgage.
It’s clear that:
If you have a plan, it’s always good to do an annual check that your investment is still in the green.
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.
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.
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.
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 when the day comes, and you can’t repay your loan. However, there are ways to prevent that from happening. But, if you’re already floating in the unpaid loan boat, then there are also ways of combatting the tidal waves before you drown. After reading our eight alternative repayment vehicles, you’ll hopefully be bound for the harbour of being debt-free in no time.
For any further questions or enquiries, please don’t hesitate to contact us. We’re here to help you every step of the way.