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Interest Only Repayment ?

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How to repay your interest only mortgage and stay in your home ?

Many articles that discuss the growing problem of people who have interest only mortgages but no means of repaying them, tend to focus on two basic solutions. The first is to re-negotiate or alter your mortgage, either by extending the term and / or switching some or all of it to repayment. The other is to sell up and buy a smaller property – downsizing.

While the idea of working with your existing mortgage lender is an important first step, it may not be practically possible. You may not have sufficient money to make larger payments and, even if you could, mortgage lenders have got much tighter on their lending requirements and may not be willing to accommodate your wish for a longer term.

The problem with downsizing is obvious, you are going to have to leave a home you may have grown to love, and your new home may not be as nice or comfortable.

There is however a solution that could see you completely repay your interest only mortgage and allow you to live in your property for life – Equity Release.

While we would suggest that you should consider other alternatives first, equity release may be an ideal solution for some people. If you are unable to repay your interest only mortgage then at some point you will be forced to leave your home. If you use Equity Release, while you can stay in your home for life, but it is unlikely that your children or family could inherit it after you are gone. Nevertheless some may consider that a price worth paying.

To understand how equity release can repay an interest only mortgage, let us look at the following scenario.

In 1989 the average house price in the UK was £61,495*.

Mr and Mrs Typical, both aged 40, bought an ‘average’ house for £61,495* using an interest only mortgage of £50,000 over a term of 25 years.

It is now 2014 and their average house is now worth £189,002*. They now need to repay their £50,000 mortgage but they do not have any savings or access to this amount of money.

They love their home and want to stay in it.

On using our instant equity release calculator, they discover that a 65 year old could take out an equity release loan of £55,000. They therefore apply for a loan of £50,000.

The £50,000 is used to repay the interest only mortgage in full.

Mr and Mrs Typical having repaid their interest only mortgage, can now stay in their home until the last one of them dies or is taken into long term care. Although there is interest owed on the equity release loan, Mr and Mrs Typical do not have to make any repayments whatsoever. Instead the interest is added to the outstanding loan. Each year interest is charged on the original loan and the interest added to it. This is a process that is known as ‘rolling up’ the loan.

Mr and Mrs Typical’s children are supportive of their parents taking out the equity release loan. While they realise they will receive a reduced inheritance, they consider their parents’ happiness more important.

Will the Children inherit anything ?

There are two key factors that will determine whether the children will inherit anything, how long their parents live and the value of the home when the last parent dies. Neither can of course be guaranteed.

The rolling up process can soon make the amount owed to the equity release lender mount up. However it is also important to remember that the loan can be repaid at any time. Therefore if Mr and Mrs Typical or their children have a sudden windfall five years after taking out the equity release mortgage, they could choose to repay the loan.

As an indication of what could happen, we will assume that Mrs Typical outlives her husband and dies at the ripe old age of 90. If we assume that house prices have performed exactly the same as they have for the previous 25 years, then the family home would be worth £580,803.

The original £50,000 equity release loan has an interest rate of 5% and has therefore rolled up to a£179,561.

In this example, the children of Mr and Mrs Typical would inherit £401,242. Not bad for parents who couldn’t originally repay their mortgage loan.

If you have an interest only mortgage and want to understand more about using equity release to repay the loan so that you can live in your home for the rest of your life, please call us on 020 33 55 4837

* Source - Halifax Average Home Price Index since 1952

Published : 20th February 2015
Nothing in this article should be taken as personal advice and recommendation. UK tax rates and legislation are liable to change. Products, concepts, rates, legislation and rules referred to in the article above may not be current at the time you read the article.
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