Interest- Only Mortgage Expiring
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Interest-only Mortgage Expiring
This time on the mortgage and protection podcast we’re talking all about Interest-only mortgages expiring with Kevin Spear from Mortgage Marketplace.
This material deals with Retirement Interest Only mortgages and Lifetime Mortgages – products are FCA regulated, broker and lender fees apply. Products may not be suitable for all borrowers. To understand the features and risks, ask for a personalised illustration.
Your property may be repossessed if you do not keep up repayments on your mortgage.
What happens when an Interest-only mortgage comes to an end?
In the marketplace at the moment, people that previously had Interest-only mortgages linked to a pension, ISA or, more often an Endowment Policy, which has long since been cancelled, are in a position where there is no repayment vehicle to repay their lender. This means that there are people needing to pay back a substantial amount of money in the tens, or sometimes hundreds of thousands, with no capital lump sum in their portfolio of savings or investments.
If you can afford to do so, you may be able to convert any interest only element to a repayment mortgage over the same of extended term (if this is agreed by your lender), provided you take action early enough and have some time left until mortgage maturity – this will however substantially increase your monthly payments and may not be affordable. As a result, some people in this position may need to consider a Retirement Interest Only mortgage or a more specialist Lifetime Mortgage Lender. Needing to service a debt near or in retirement or having to produce proof of income when finances are tight can be daunting. A specialist Lifetime Mortgage, otherwise known as Equity Release, can solve some of these issues. Always take advice and consider your options and discuss your situation with your lender.
What are my options if I can’t repay the capital on an Interest-only mortgage?
The good news is there are a number of options open to individuals in this predicament. The first option is to sell the property to repay the mortgage. Typically there’s enough equity in the property to perhaps buy either a mortgage-free property, or one with smaller, more manageable mortgage payments.
Many people, however, would prefer to stay in what has likely become the family home. In order to retain ownership of the property, the client would need to consider remortgaging with a Lifetime Mortgage provider or look at a retirement interest only option
At Mortgage Marketplace, we specialise in later life lending, and there are a number of options within that space. A straightforward Interest-only mortgage with a specialist lender who deals with later life lending or a Retirement Interest-only mortgage, is one option. As this relies upon the client demonstrating an income, such as a substantial pension or a job that will continue for some years, it won’t suit all applicants.
At the other end of the scale, Lifetime Mortgages are an Equity Release product, which does not require clients to demonstrate affordability because they have the option to pay interest if they wish, or allow it to roll up year on year.
How long can you stay on an Interest-only mortgage?
The retirement Interest-only mortgage is a loan aimed at older consumers where the lender will not seek repayment of the loan until a specified life event (usually the customer’s death or move into residential care). At that point the loan is repaid through the sale of the property. Whilst this option will allow borrowers to remain in the property, contractual payments to service the interest are required and affordability will be assessed in the same way as a standard mortgage. Sometimes a combination of a Retirement Interest-only mortgage for a period of years that is then replaced with a Lifetime Mortgage is a good option.
Can you extend the term of an Interest-only mortgage?
It’s unlikely that a high street lender would extend an Interest-only mortgage if it is close to the end of the mortgage term, however, they may entertain a remortgage onto a lifetime mortgage or retirement interest only product, if they have a suitable alternative available. Typically this is uncommon, however, as high street lenders tend not to specialise in later life lending.
A client in this situation would therefore have substantially more options if they engage with a broker who specialises in later life lending.
Can I get a mortgage at 60?
It’s absolutely possible. Lenders typically have a percentage of the property value which they are willing to lend, according to the borrower’s age. The younger you are, the less money you’re able to borrow, or the older you are, the more money you’re able to borrow against the given value of property. As with all mortgage borrowing, this may not be an option for everyone and it therefore best to speak to a qualified adviser for a personalised recommendation.
Equity release is available from the age of fifty-five onwards, but we have helped clients in their eighties renegotiate their mortgage, we’re there to assist everybody.
What are the advantages and disadvantages of servicing the interest?
The obvious advantage of a retirement Interest-only mortgage, is that the level of debt does not increase. Therefore If you borrowed a hundred thousand pounds, as long as you’re servicing the interest as required, the debt stays the same and the payments are low, given that the capital is not being repaid. You may also be able to make overpayments to further reduce the debt.
There’s quite a significant difference between a repayment mortgage and an interest only payment in terms of a monthly cost. You will only pay around a third of the cost of a repayment mortgage, per month. Borrowers are however advised that as interest is charged on a capital that does not decrease over time, interest only borrowing can be an expensive overall solution. You should speak to a qualified adviser to discuss circumstances, needs and suitability. Overpayment options are also available – your adviser will discuss these and how they may work for you.
On the other hand, Lifetime Mortgages do not require any payments to be made, however, they do offer the flexibility to do so if the client can afford it. Clients with retirement income that’s fixed-rate, or linked to inflation, are unlikely to see a significant increase throughout their retirement period. Sometimes it can therefore be beneficial to start with the option of paying the interest, or a proportion of it, especially if employment income will continue for a period of time.
When we give Lifetime Mortgage advice, we suggest that payments can be altered, or switched off completely, allowing for ad hoc voluntary payments. There’s flexibility from the beginning of those types of contracts, right through to when the property is sold or go into care. Servicing the interest will offset the effect of roll up – this is particularly useful if you wish to preserve the equity in your home as much as your finances will allow for the benefit of your beneficiaries or for potential further borrowing down the line.
My existing mortgage lender is sending threatening letters. What can I do and how can you help?
When a mortgage company expects a final mortgage repayment, it’s fairly common for them to write to borrowers a few months beforehand, informing the client that the mortgage is coming to an end. These letters are quite formal, and often clients are concerned that they might lose their home due to the wording used. You should have already received correspondence from your existing lender as this is a requirement to ensure borrowers are aware of the nearing maturity and are provided with the option and time to arrange a solution. It is their responsibility to ensure that your mortgage is fully repaid.
Lenders and intermediaries alike are aware that clients may be vulnerable when they receive this type of correspondence, so we aim to reduce some of the associated anxiety and seek to offer a solution within a reasonable timeframe.,
It’s fairly straightforward to replace an existing Interest-only residential mortgage with an alternative from later life lending options. Our qualified advisers will provide you with a personalised recommendation, having discussed and assessed your circumstances, and there is an industry watchdog that regulates this type of mortgage agreement, which protects borrowers and ensures only suitable and appropriate products and solutions are recommended.
How long do I have to sort this out?
You should speak to a qualified adviser as soon as possible. We would also encourage clients to speak to their lender as soon as they feel they may not be in a position to repay their mortgage and ensure they understand their obligations and options.
Equally, we’re quite happy to communicate with the lender on behalf of the client, with signed consent, allowing us to discuss your existing arrangements and alternatives.
Typically the process takes about two months, from initially speaking with us to the completion of the Lifetime Mortgage application. Not all borrowers or properties are the same so please remember that all applications will be assessed by the lender we recommend and the decision and/or information they require is at their discretion. We will only submit an application on your behalf if we are satisfied that the solution we are recommending is suitable for you. The outcome of applications will depend on your circumstances such as credit history, age and property particulars – this is not an exhaustive list.
Will the lender repossess my home unless I can repay my mortgage at maturity?
Unfortunately yes, lenders can and on occasion will repossess a property if the debt isn’t paid back. Whilst this is a last resort and involves a legal process when all other options to recoup the funds have been exhausted, it is a possibility for all borrowers in breach of their mortgage contract. There are plenty of options available and a number of Mortgage Advisors in the UK today, like ourselves, who will review your needs and look for a possible solution. Always speak to a qualified adviser and discuss any concerns you have with your lender as early as possible.
What if I haven’t got enough money to pay my mortgage?
Typically a lifetime mortgage comes with a number of options. Interest can either be paid in full every month or it can be partially paid – there is no obligation to make any payments if you don’t wish to do so. If you only pay some of the interest, the remainder will be added to the balance of the mortgage – over time, this will erode the equity in your property. With a retirement interest only mortgage, the interest must be covered, and the lender will carry out an affordability check to ensure you can afford to make the payments before agreeing to lend. Your adviser will assess your needs to determine which product is suitable for you.
Often people are asset rich but income poor, and a lifetime mortgage where no payments are made towards the loan is an option allowing them to access the equity in their property. This is known as interest rollup.. If applicants can afford and wish to make some or all of the interest payments, we generally guide them down that path by explaining all their options, advantages and disadvantages by producing personalised illustrations. f . Interest rates are fixed for the lifetime of the contract, so your adviser is aware of the cost of the debt year on year and will share this with you. Early repayment charges may apply if you choose to redeem your lifetime mortgage early, which will be added to the overall borrowing – your adviser will discuss your intentions and explain any pros and cons.
Historically endowment policies were expensive, didn’t always perform as expected and were unfortunately often mis-sold by less scrupulous advisors. The regulatory environment has changed significantly over the years and lenders and brokers alike are now obliged to act with the borrowers’ best interest at heart. Whatever the situation, speak to your lender and seek independent advice from a qualified professional as early as possible if you are worried you may not have sufficient funds to repay your interest only mortgage.
Plenty of material about the various myths surrounding Equity release mortgages is available on our website, and the Equity Release Council is also a fantastic source of unbiased, consumer centric advice.
This material deals with Retirement Interest Only mortgages and Lifetime Mortgages – products are FCA regulated, broker and lender fees apply. Products may not be suitable for all borrowers.
To understand the features and risks, ask for a personalised illustration.
Your property may be repossessed if you do not keep up repayments on your mortgage.
Frequently Asked Questions
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Typically, the mortgage process will take 2-6 weeks to reach approval.
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Please be aware, the process is currently taking longer due to Covid-19. Please see question ‘How has Covid-19 affected the mortgage market?’.
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