Interest-only mortgage mess? Don’t Panic!
An interest-only or endowment mortgage is one where you pay only the interest and not the mortgage balance itself. They’re big business: there are over 1.6m interest-only or part-interest mortgages in the marketplace, nearly 20% of all outstanding UK mortgages.
If you’ve got one, your biggest concern is: how are you going to pay it back? Don’t panic, just make sure you have a strategy in place.
Most people with an interest-only mortgage will have set up an investment or repayment vehicle – typically a PEP, ISA, endowment policy or personal pension plan – to give them a lump sum to pay off the borrowing at the end of the term.
But is that strategy still the right one? If you have a repayment vehicle, you have options:
1. Cash in and switch to repayment terms
It’s potentially advantageous to cash in now instead and pay off some of the balance, and switch over to a repayment mortgage that will see your loan completely cleared at the end of its term.
Doing this is probably your cheapest long-term option. You’ll have a smaller remaining balance, though you’ll also have higher monthly payments.
If you find the new premiums too high, ask if you can extend the term and push it out a little longer. But don’t go too far into the future – don’t extend debt past your retirement date.
An important note: 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.
2. Maintain your position
If your repayment vehicle is on track and you’re happy with it, then you might choose to maintain your current status quo on the understanding that your strategy will cover your final lump sum payment. But do keep an eye on it and keep it under regular review, this is a higher risk approach
3. 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 or plans you have. Unfortunately, for many, switching AND continuing the investment vehicle is expensive and unaffordable.
4. Cash in and downsize
What you might have to do at the end of the term (or before) 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 now and pay off some of your mortgage, 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 is a former Financial Professional of the Year and his bestselling book, The Money Plan, is now available on Amazon. Get more money tips at www.warrenshute.com