Nearly 400,000 individuals are due to repay their interest-only mortgage within the next 5 years – but around 250,000 won't be able to switch to a brand new deal, based on research from Kensington Mortgages.
Remortgaging is a popular method of paying off an interest-only mortgage, but one fourth of the million customers may not have that option, the research found.
These ‘mortgage prisoners’ will face a bill for their entire mortgage when their loan matures. And as these borrowers have only paid the interest on their own loan – not the loan itself – the amounts due might be in the thousands and thousands.
Older homeowners or those already in retirement could be hardest hit.
Read on to determine whether you’ll be affected, and what your options are for freeing yourself from an interest-only mortgage debt.
How do interest-only mortgages work?
With interest-only mortgages, you only have to pay from the interest from month to month. This prevents your monthly payments low, however your loan balance stays exactly the same size over the course of the loan.
When your mortgage involves the end of its term, you'll need to repay the entire amount. This can be done by selling your home, paying with cash or remortgaging.
But for older customers in particular, remortgaging may not be possible.
While these loans haven't been accessible since the 2008 financial crash, thousands of borrowers stick to interest-only deals that are now set to mature.
By 2024, Kensington forecasts there will be around 250,000 people who can’t remortgage, and by 2029 this figure will grow to roughly 430,000. That’s half of the 860,000 people whose interest-only mortgages may have come to term by that point.
Why can't interest-only mortgage prisoners remortgage?
The FCA recently loosened its rules on lending to assist some interest-only mortgage prisoners switch to new deals. These reforms were meant to help homeowners who currently find it difficult to pass tight affordability checks.
Kensington's research, however, suggests borrowers approaching retirement will still face obstacles as a result of insufficient mortgage options for older borrowers.
According that? analysis of information from Moneyfacts, just one in ten mortgage products on the market doesn't have maximum end-of-term age. For over a third of deals, you’ll have to be 75 or under when your term ends.
Naturally, this will create problems for borrowers who will already be in their 60s and 70s.
If you can’t repay your interest-only loan by remortgaging, you may want to sell your property and move out. This is far from well suited for many householders.
Thankfully, there are other options you can consider.
Alternatives for interest-only mortgages
Retirement interest-only mortgages (RIOs)
A typical RIO mortgage works similar to any interest-only mortgage, with your monthly obligations covering the interest on the loan.
The difference is that you’ll usually remove the balance with the sale of your home after you die or move into long-term care. This will cut into the inheritance you depart to the next generation, but could make you stay in your home.
At first, the field was dominated by smaller building societies, but recently Nationwide entered the fray. There are now a minimum of 20 lenders who offer RIOs or other later life financial products.
The RIO mortgage market is an intricate area, so be sure you read our in-depth guide for everything you need to know.
Equity release and lifelong mortgages
If you've equity inside your property – for example, because property prices have risen since you bought – you could look at equity release.
A lifetime mortgage enables you to, in ways, ‘withdraw’ money out of your equity and cover it with another loan.
Like a RIO, an eternity mortgage is payable with the sale of your house whenever you die or transfer to care. Unlike a RIO, you won’t pay anything more every month.
The downside of a lifetime mortgage is that your loan balance will still accrue interest, which is put into the total you owe. This means the final amount you repay will probably be higher than your initial amount borrowed.
Overpay your mortgage
If you really can afford it, overpaying your interest-only mortgage is a great method to prepare for no more its term.
Say your interest payments are lb500 per month. Should you pay lb600 a month instead, lb100 of this goes towards paying off your mortgage balance.
This means that after your term, you’ll be confronted with an inferior bill.
Many interest-only deals charges you you additional for paying early, check first whether your mortgage has early repayment charges (ERCs), or limits how much you can overpay each year.
- Use our mortgage overpayment calculator to determine how much you could lay aside by overpaying.