Interest-only mortgage mess? Don’t panic!
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INTEREST-ONLY mortgages, aka endowment mortgages, have been in the news and many people have contacted me for help asking what they should do now that their mortgage is due up and they still owe in excess of £100,000.
The FCA released a notice about its concerns on this subject at the beginning of the year because 2018 shows a peak in the number of mortgages coming due, especially interest-only mortgages. There are further peaks due in 2027 and 2032.
We’re talking big numbers here: 1.67m interest-only or part-interest mortgages are in the marketplace at the moment, which represents nearly 20% of all outstanding mortgages in this country.
How do interest-only mortgages work?
AN interest-only mortgage is one where you pay only the interest and not the mortgage balance itself.
If you have a £100,000 mortgage charged at 5% annual interest, at the end of the year you’ll have paid £5,000 but you still owe £100,000; fast-forward 25 years and you still owe that £100,000.
If you’ve got one of these mortgages, your biggest concern is how are you going to pay it back? Make sure you have a strategy in place – here are your options.
Evaluate (and re-evaluate) your original thinking
GET organised by knowing what you’ve got: your assets and liabilities, your income and expenditure. What assets can offset against your final capital payment? And is your original strategy still the right one?
Most people with an interest-only mortgage should have set up an investment or repayment vehicle to run alongside it – possibly a PEP or an ISA, or even an endowment policy or personal pension plan – giving them a lump sum to pay off the borrowing at the end of the term. If you did, you have a few options available: ■ Cash in and switch to repayment terms
AS a rule of thumb, if you have an endowment policy or ISA that was put in place to repay the mortgage at the end of your term, it’s probably advantageous to cash in now instead and pay off some of the balance. At the same time, you should switch to a repayment mortgage that will see your loan cleared at the end of its term.
An important note to remember: if you’ve had a policy running for less than 10 years then check for any tax liability or surrender charges before you cash it in; if in doubt, seek professional advice first.
■ Maintain your position
IF your repayment vehicle is on track and you’re happy, then you might choose to maintain it on the understanding that your strategy will cover your final payment. But keep it under regular review.
■ Switch and maintain!
IF you can afford to switch the interest-only mortgage to a repayment one over the remaining term, plus keep your savings vehicle going, then that will give you a nice addition to any retirement funding. But for many, switching AND continuing the investment vehicle will be expensive and unaffordable.
■ Cash in and downsize
WHAT you might have to do at the end of the term (or even before it so that you’re not under pressure) is to sell your property. Downsizing might have always been part of your strategy, or it might be something forced upon you by your finances.
Either way, if you cash in your investment vehicle now and pay off some of your mortgage, then when it’s time to downsize you’ll have lots of equity, potentially enough to buy a smaller property and have some money left over.
■ Warren Shute was named the UK’S Financial Professional of the Year (2017). His first book, The Money Plan, is now available on Amazon. Get more tips at warrenshute.com or tweet him @warrenshute