Don’t let your interest only mortgage blow up in your face!
An interest only mortgage is exactly what it says on the tin – a home loan that enables the borrower to service the interest only, never bound to pay off the mortgage capital until the end of the term.
Interest only loans are a popular choice for those wishing to purchase a buy-to-let property as an investment, people with long term savings or investment plans or those who just simply feel it’s an affordable option when buying.
Still owing the lender the capital of a property at the end of the term can be incredibly risky for those that aren’t using the property as an investment or do not have another repayment vehicle in place.
So how do we make sure that we are not left looking at a repossession at the end of term?
Below we have some tips for ensuring that Mortgage time bomb doesn’t blow up in your face…
- Cold hard cash – This will need to be kept in a savings or investment account you will need to calculate the amount that you will need to save over the term of the loan including any interest you may earn (bearing in mind that interest rates fluctuate) and don’t ‘dip in’ to it!
- Lifetime mortgages/over 55 mortgages– Switching to a lifetime mortgage could be an option for the more mature borrowers, releasing some of the equity from the property could pay off the existing mortgage providing there is enough equity in the property to meet the lenders criteria.
- Switching to repayment mortgage – This could be an option if you still have some considerable time left on the term, remortgaging to a repayment option would be considered if you are finding yourself with additional income due to changes in circumstances etc. Maybe you now find yourself in a position whereby you could comfortably afford the monthly payments on a repayment mortgage.
- Switching to a new interest only lender with a more flexible end date – With people living longer it makes sense that lenders are looking to extend lending for older people. For example, Aldemore are currently offering later-life mortgages, these mortgages offer multiple product options including products with no early repayment fees and opportunities to extend repayments into the future, so you can borrow what you need and pay it back at a manageable rate. With lending up to 85 years old, this could be a viable option for many!
- Stocks & Shares ISA’s – These are brilliant for those who don’t need to access their money and want to keep it invested for a few years so that’ll be you ‘interest only mortgage candidate’! Currently you can pay up to £20,000 a year into an ISA and majority of the income you make will be tax free, but hang on a minute… there’s a clause, because the money is invested into the stock market, the value can fluctuate, the best way to ensure you are investing correctly is to keep a regular eye on your ISA’s.
- Pensions – With a pension you cannot access the money until you are 55, the idea is that the funds that you build up will give you an income during you treasured twilight years, its often used as a great way to pay off your mortgage also. Many pension’s offer a guaranteed lump sum if you continue with the agreed payments for the term. However, with the tax-free lump being 25% you need to be aware that the pension fund will essentially need to be 4 times the mortgage borrowing.
- Investment Bonds – An investment bond locks away your savings into a fund of your choosing normally for a fixed term, you can generally access small amount each year. They require you to invest a minimum amount of money to start which is tied up until the bond matures. If you are risk averse then these are a great option as many do guarantee that you won’t get back less than you invested, however you will pay tax on the income these bonds generate.
- Shares – Buying and selling shares on the stock exchange are where the money is at but bigger returns generally mean bigger risks. If you know what you are doing and enjoy a fission of adrenaline when it comes to your finances shares could be the choice for you. Financial advisers would not generally recommend that you rely solely on these shares to fund the payment of your mortgage loan due to the risks involved.
- Unit Trusts – Are managed share funds that pool resources and are managed by a competent professional. They are a great choice if you want to invest in shares but aren’t really savvy or confident in the financial risk factors, you can choose the level of risk that you are happy with and need to make regular contributions.
- Sale of the property – Confirming that you are prepared to sell the property at the end of the term can be another option especially with buy-to-let properties. The risks involved are minimal as property generally increases in value over the term.
- Downsizing – This is a great option for those who bought a family home interest only and now the family have Grow up they no longer need such a large property, downsizing makes sense. There may be enough equity in the property to buy a smaller property?
- Rent a room – The Governments ‘Rent a Room Scheme’ lets you earn up to £7,500 per year tax-free by renting furnished accommodation in your property, this is halved if you share the income with a partner or someone else, you can let out as much of your home as you want. This income could be used to over pay on your mortgage, helping to reduce the capital on the mortgage.