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Interest-only mortgages become a ticking time bomb

Interest-only mortgages become a ticking time bomb

Category: Mortgages
Author: Leanne Macardle
Date: 05/10/2016

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

Interest-only mortgages can often seem appealing at first glance. After all, you're initially only paying back the interest of the loan, which means monthly repayments are far less than with a full capital and interest arrangement. You'll of course have to repay the full mortgage eventually, but that's years away, right? Well, for many interest-only borrowers, the deadline is closer than they'd like.

Interest-only warning

New research from financial mutual OneFamily shows that over a quarter (27%) of interest-only mortgage holders may not be able to pay back their loan at the end of the agreed time period, and with the expected unsettled debt standing at an average of £21,000, that's a lot of cash to come up with.

Given that 10% of respondents admitted that they have no plan in place to pay off their mortgage – and no idea how they'll do so when the debt is due – it paints a worrying picture of the future of many borrowers' finances. This could be compounded by the fact that 18% said that they didn't understand the loan, while 23% didn't know what interest rate they were paying, which means many could get a shock when the time comes and they need to pay off the outstanding amount in one lump sum.

It seems that, while interest-only borrowers should have a clear repayment plan in place even before they take out the loan, many leave this kind of forward planning far too late. Of course, it's tempting to think that some kind of solution will present itself in the decades ahead, but as the figures show, it isn't always that simple, and many people are finding themselves with a ticking time bomb of debt as a result.

"Our research adds to a disturbing picture facing thousands of homeowners who do not yet know how they are going to meet their mortgage obligations," said Simon Markey, CEO of OneFamily. "With many just not sure what to do, it's vital they seek advice on all the options."

What can you do?

If you're approaching the end of an interest-only mortgage term and have no idea how you'll pay off the final bill, there are things you can do – and panicking shouldn't be one of them!

The research found that 24% of mortgage holders plan to downsize in order to pay off their debt – selling their home and moving somewhere smaller can often free up valuable funds that can be used to clear the initial loan, although it's worth pointing out that those with years still to go on their mortgage term may not want to rely on this method given the threat of falling house prices.

Other methods considered by borrowers include making overpayments (24%), allowing them to clear the debt over time rather than being left with a lump sum at the end. If you're thinking of going down this route, just make sure you keep up with those overpayments – evidence shows that many borrowers don't, which can still leave them with unexpected and unwelcome debt at the end of the term.

What about endowment policies? The research found that 19% plan to cash in such policies, with this traditionally being the most popular repayment vehicle for such a loan. However, in recent decades many borrowers have found that their policies haven't been able to deliver the expected returns and have been left short of the funds they need as a result, so if you're still relying on this method, make sure to check your policy's performance.

One option that's growing in popularity is a lifetime mortgage. A type of equity release product, a lifetime mortgage could give you the funds you need to clear the interest-only mortgage without needing to downsize, which for many, could be the ideal solution.

"For homeowners in or approaching retirement, lifetime mortgages offer a real alternative," added Simon. "They give families more choice and greater flexibility in how they manage their finances. They are also a great solution for people facing a repayment shortfall at the end of their interest-only mortgage and a means of unlocking capital while staying in the family home."

Does this sound appealing? Contact our no obligation equity release planning service to see if this could be a solution for you, and hopefully the interest-only bomb can be defused with the minimum of hassle.

Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.