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Selling December 1, 2015

Interest Only Borrowers need to plan

Interest Only Borrowers need to plan

Citizens Advice has warned that there could be almost a million mortgage borrowers with an interest only mortgage but no plan as to how they will repay the mortgage.

Interest only mortgages do exactly as the name suggests with the monthly payments only covering the interest charge.  As a result the capital balance is not reduced and the borrower will need to repay the whole of the mortgage amount at the end of the term.

Traditionally, the borrower would have made regular contributions into an alternative repayment vehicle to run alongside the mortgage.

These are typically investment backed vehicles such as endowments or stocks and shares ISAs.  The hope is that the vehicle will grow sufficiently over time so as to reach the target amount required to pay off the mortgage.

However, some have taken no repayment vehicle at all, relying instead on the sale of the property to cover the balance.  The fear is that they could reach the end of the term with no means to pay off the mortgage, which could result in them having to sell the property to pay off the mortgage.

Anyone in that situation would do well to try and put a plan in place sooner rather than later, as the longer they leave it the harder it can become.  Switching the mortgage to repayment will mean that monthly payments increase but shopping around for a keener rate can help minimise the impact as much as possible.

If that looks too much to take on, putting funds aside or overpaying the mortgage as and when it’s possible will at least start the process of reducing the mortgage.  Just be careful to check that any overpayments will be within allowed limits so that no early repayment charges are incurred.

Even those with a repayment vehicle in place should regularly review their plans, in order to ensure that they remain on track to meet their target.  If there is any potential shortfall then, again, it makes sense to try and deal with that sooner rather than later.


Guild Mortgage Service, Provided by London & Country Mortgages


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