More then a million people in the UK with interest-only mortgages are facing financial trouble when the time comes to pay them off.
Approximately 2.6 million people have interest-only mortgages and it has been estimated by the Financial Conduct Authority that nearly half will not have the necessary funds to cover the final bill.
According to research from FCA, the average shortfall for those with interest-only mortgages is £71,000.
Those with interest-only mortgages (about a third of all UK mortgage holders) make monthly repayments to cover the cost of interest on the mortgage.
The full amount should be paid once the mortgage term matures, usually after 25 years. This should be funded with savings, inheritance or from the sale of a business.
These mortgages were popular in the 90s where they were often sold alongside an endowment policy. They were also popular during the last decade when homeowners were optimistic about rising house prices and wages.
Mortgage lenders have agreed to write to those with interest-only mortgages to ensure that they have a repayment method in place.
One of these methods will be to increase your monthly contributions so you start reducing the amount you owe. Most lenders will allow you to overpay by up to 10%. This will also reduce the loan-to-value (LTV) making it easier to remortgage.
Another option would be to switch to a repayment mortgage. This will cause your monthly repayments to increase as you will be paying off capital as well as interest so you need to budget and ensure that it is affordable.
Starting a savings account could also help ensure you have the necessary funds needed when your mortgage matures but you’ll need to make sure you pay enough into it and discipline yourself not to raid it.
Downsizing to a cheaper house will also enable you to free up some cash but you should make sure you can free enough cash by doing this.
If you find that you’re struggling financially you should speak to a properly regulated financial solutions provider.
The Debt Advisor is a member of The Debt Resolution Forum and is regulated by The Financial Conduct Authority no 606669.