Mortgage Q&A
QI’m financially sound and have some extra cash. Can I pay off a chunk of my mortgage?
AIn these happy circumstances, it makes sense that you want to pay off your mortgage and help make significant savings on your monthly outgoings. Most lenders usually allow you to overpay by around 10% a year during the term of a fixed-rate mortgage, but do check first because, if your lender has restrictions, you could be charged a penalty for early repayment. These details will be on your mortgage agreement, but check with your lender and ask about the Early Repayment Charge (EPC), which typically varies between 1-5%.
Think about whether your mortgage debt is a priority. If you have other debt, such as credit cards or loans, then consider paying these off first. Plus, don’t forget your emergency fund! There will be a time when you have unexpected costs. The rule of thumb is to have three months’ income saved for emergencies.
QI’m thinking about going for equity release?
AIs it a good idea? There may a few reasons why you need extra money later in life and, if you have a house, it’s an asset you can use to raise capital. You do this without moving by using lifetime mortgages – a form of equity release. With a lifetime mortgage, you take out a loan with a fixed interest rate, secured against your home, which doesn’t have to be repaid until you go into care or die – at which point the house is sold and the money is used to pay back the loan. The cash left over can go to beneficiaries. Some find this a useful way to unlock the equity in their home to fund retirement, but it is increasingly being used to help children buy their first home. You should always talk to a specialist adviser before contacting equity release companies to see if this is the right option for you.
QI have an interest-only mortgage. What should I do?
AThis is where you only pay the interest during the mortgage term and repay the full amount you borrowed when the mortgage matures. This applies to around one in five mortgage holders, but there are concerns that shortfalls in repayments may see people lose their homes. The Financial Conduct Authority warned about interest-only mortgages back in 2013 and, although there has been a reduction since, there are still 1.67 million in the UK. Here’s what you should do:
Check how much you owe and when it is due. Then assess your financial situation and see what position you are in for repayment.
Start saving. Set aside a dedicated account for the mortgage repayment. Contact your lender or a mortgage adviser and discuss a repayment plan. If you have a high interest rate, see if you can remortgage to a better rate. Talk to stepchange.org for help on alternatives, such as downsizing.