If you are one of the many people who used an interest only mortgage to purchase your home the time could be coming when you may need to make some tough decisions. Since you bought it, your home may very well have doubled in value, but if the only way you can pay back your mortgage lender is to sell the home, it may not be the outcome you imagined when you first bought it.
Back in the days when customers were allowed to “self certify” their income, many people also opted to take an interest only mortgage. The logic being that as only the interest on the loan was being paid, the mortgage was cheaper. Some people therefore set their interest only mortgage payment to the maximum they could afford, which meant that they could by a more expensive home than they could have, had they used a repayment mortgage.
We now have a situation where a considerable number of people in the UK are racing towards the end of their mortgage term , but don’t have sufficient savings or investments to repay the loan. Our view is that, this situation won’t go away and will get worse if you don't make plans now.
Equity Release could pay a part in helping you stay in the home you love and want to keep. If you are aged 60 or over then you could take a significant lump sum out of your property and use the equity you have released to repay your interest only mortgage. However there are many reasons why you shouldn’t rush to equity release too soon. In very simple terms the older you are before you use it, the greater the percentage of equity you will be able to release. This also shortens the term of loan, which reduces the amount of the debt on the death of the last person named in the mortgage. This means that more of the value of your home passes to your children or estate.
It would be ideal if the amount you could release from your home was sufficient to repay the mortgage. In such a situation, your mortgage is repaid and you can stop paying interest to your mortgage company. You can then live in your home for life. Equally there are no regular payments to make to the equity release company and on the death of the last person named on the mortgage, the home is likely to be sold to repay the debt plus accumulated interest. For some equity release could be the ideal way to repay an interest only mortgage and stay in your home.
Of course it may be that the amount you can release from your home still isn’t sufficient to fully repay the mortgage. For this reason we suggest that you should start taking some action now to lessen the risk of having to sell your home when the mortgage term ends. One of the best things you should consider is to start making overpayments to your interest only mortgage now. All mortgage providers will allow you to do this, many even encourage it.
Regular overpayments can soon take a sizeable chunk out of your mortgage debt. As a very crude example if we assume a customer has a mortgage debt of £100,000 and makes a monthly interest only payment of £300. To keep this very simple we will also assume that interest rates don’t change. The customer arranges with their mortgage provider to make an overpayment of £100 and they therefore set up a new standing order for £400 per month.
From the first months payment; £300 pays the interest on the loan and £100 comes of thier mortgage debt. They now owe the lender £99,900. The following months interest is only payable on this outstanding amount. For the sake of the example we will assume that £299 is the required interest, meaning that the £1 interest saving is added to the £100 over payment taking £101 off the mortgage loan. While this may not seem to be too big a benefit at this stage, overtime more of the money you pay will go towards reducing the loan and less on interest payments.
Forming a long term repayment strategy means that when the time is right, equity release could be a very effective tool in helping to repay your interest only mortgage. While the accumulated interest may require your home to be sold after you have gone, and not passed to your children, the peace of mind from knowing you a safe in your home for life could be all you and your children wish for.