Interest-only mortgages became extremely popular during 2000, and research conducted by Citizens Advice, shows that there are today, about 3.3 million UK citizens with these types of mortgages.
By taking out an interest-free mortgage, borrower’s monthly payments are based only on the loan interest, with the balance staying the same. The idea behind these interest-free mortgages, is to allow borrowers to accumulate money over the years, and then pay of the entire balance of their mortgage at the end of the loan period.
Studies show however, that as many as 890,000 people – a quarter of the number of original borrowers, might not be in a position to repay their interest-only mortgage loans when their loan term ends.
Our guide will give you all the information you need, to give you a better understanding about interest-only mortgages.
Interest-only mortgages are like a time bomb about to explode!
According to OneFamily research, more than 20% of those with interest-only mortgages will be unable to repay their loans at the end of their loan term period, and the average debt owed by these borrowers is £21,000.
One out of every ten borrowers do not have a plan in place to pay back their loans, and about 430,000 others have said that they have no idea how they will repay the balance of their loans. Advice from Simon Markey, the CEO of OneFamily, is that all those in this position find out as soon as possible what their options are to repay their loans before the agreed deadline, to avoid having their homes repossessed.
What to do if you have taken out an interest-only mortgage
If you are worried that you will be unable to pay your loan at the end of term, there are several things you can do to give you peace of mind, including:
- Scaling down – Try to downsize if you can, like many other mortgage holders are doing. It involves selling your current home, and moving to another one that is smaller and less expensive. The money you save every month will help you to pay off the balance of your loan.
- Clearing your debt by making overpayments – You can do this every month once you have saved up the minimum amount you need to pay off the balance of your loan if you have a flexible interest-only mortgage loan, where the interest is calculated every day on the lump sum owing. Most mortgage loans, both fixed- and discount rated, will let you make overpayments of up to 10% annually, without penalising you.
- Cashing in your investments – Another option for settling your mortgage loan, is to cash in any investments you have, such as ISAs, shares, a lump sum pension payout, or endowment policies.
- Taking out a lifetime mortgage or an equity release – Many lending companies have started offering these products in the past few months, that enable you to remortgage your home so that you can repay your mortgage lender. The interest charged is on the size of the loan you make, and is usually added on to the full amount of the loan. You still own your home, and maintaining it is still your responsibility.
Further information is available at http://www.whathouse.com/mortgages-and-homes/everything-you-need-to-know-about-interest-only-mortgages/