Interest Only Mortgage Expiring

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Interest Only Mortgage Expiring

Ashleigh Halit explains the options when an interest only mortgage expires.

What happens when you come to the end of an interest only mortgage?

It very much depends on the individual circumstances. You could have taken an interest only mortgage at 20 years old over 30 years. You’re now 50, you’re still working and you don’t want to sell the house. You’ve still got the debt you originally borrowed.

Maybe at the time you borrowed £200,000 and at the time the house was worth £300,000.
Now, down the line, your house is worth £500,000. You’ve got a lot of equity in there, which means you’ve got some options.

If you sit down with a mortgage broker they will go through those options with you. The key thing will be to determine whether you want to stay in that home or sell it. If you stay, do you want to keep an interest only mortgage going?

You could approach the original lender and see if you can extend with them, depending on their interest only policy and how long you can take the mortgage over. Or, you could remortgage to a different lender that might offer you an interest only mortgage to a later age.

Or, you could change to a repayment mortgage. You might, for example, plan to work until age 70, so you’ve got 20 years to pay that mortgage off before you retire.

There are various options, but it depends how old you are. If you’re already retired and you’ve got no form of income, you might need to consider an equity release mortgage, where income isn’t required, or you might want to sell your house and downsize using the equity.

This is where the value of a broker really comes in. My advice would be to meet with a broker that not only deals with mainstream mortgages, but is also an equity release specialist who can consider all of those options for you. That gets you the right value for your time and money.

How long can you stay on an interest-only mortgage? Is it possible to extend an interest-only mortgage?

It very much depends on the lender, your age and the term for the mortgage on an interest only basis. Some lenders will go up to age 68, some 70, some 75, some 80, some 85.

With extending an interest only mortgage, I’m assuming this is where somebody’s come to the end of their interest only mortgage term and they want to keep it for a bit longer. You may be able to do that with your current lender, depending on their lending criteria.

We’ve had many clients whose lender is calling the debt back in at the end of the interest only term. That lender isn’t offering the option to extend further, so we’ve remortgaged them to a different lender that allows them to have an interest only mortgage for longer.

It’s about going to a broker with access to the whole of the market. We consider as many lenders as possible to give you more options. So yes, you can extend an interest only mortgage, but it does depend on your circumstances.

How do you release equity from an interest only mortgage?

With equity, an interest only mortgage works in the same way as any other. If you’ve got an interest only mortgage and you want to take some additional equity out, your mortgage application is assessed the same way as on a capital repayment mortgage.

You would go back to your lender or broker and go through a fact find, looking at your income and affordability. It would depend on how much you want to borrow and what that pushes your Loan to Value to.

On pure interest only, some lenders only allow you to take up to 60% of the value of your property. Some lenders might go to 70%. Others will give you 50% of the borrowing on interest only, but the rest would need to be on capital repayment.

Again, you really need to sit down with an advisor and explain what you’re trying to achieve. Our job would be to try and match you up with a lender that can help you.

Do you ever own the property with an interest only mortgage?

When you have any mortgage in place, whether it’s interest only or capital repayment, you don’t own the property. The lender does, because they’ve got the mortgage on it. You borrow the money and the deeds are in the name of the lender.

Realistically, for you to own the property, you need to pay the mortgage off. Whether it’s interest only or capital repayment, it works exactly the same way.

I think this question could have a double meaning, linked with equity release. Back in the early 90s there were different ways to release equity from your property. One way to do that was to actually give up the ownership of your home. That’s a home reversion mortgage, which we don’t really see now, because it’s not the right way for you to access your equity.

You would become a life tenant in the property and the home reversion company would potentially own it, not you.

But traditionally, you own the property when your mortgage is paid off and the deeds are transferred into your name. You become the owner of the property once your mortgage is fully repaid, whether that’s an interest only or capital repayment mortgage. It works exactly the same way.

Is it better to overpay on an interest only or a repayment mortgage?

It depends on why someone would want to make the overpayments. Both an interest only or capital repayment mortgage will offer you an overpayment facility. Most lenders set the maximum overpayments at 10% of the mortgage per year.

It could be that you receive an annual bonus and want to take a chunk off the mortgage. You may have changed jobs, your income has gone up and you want to make use of the overpayment facility.

It’s always good if you can make overpayments on your mortgage because you’ll get the debt cleared down quicker, which means you’ll pay less over time.

Can I sell a property with an interest only mortgage?

Yes, of course. It’s your property. You can do what you want with it. Regardless of whether it’s an interest only or repayment mortgage, you can sell the property whenever you want.
With any type of mortgage, if you are within a fixed rate period, you may have to pay early repayment charges to pay off the loan.

If you’re selling your home to move, your mortgage might be portable, which means that you can take it across to your new property. If you’re selling with no intention of buying, just to keep the money, check the terms and conditions on your mortgage offer. You would more than likely have to pay some type of early repayment charge.

If you have a tracker mortgage or you’re on the standard variable rate, you don’t usually have an early repayment charge. Do double check your mortgage offer or call the lender.

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How do I get out of my interest only mortgage?

You could switch your interest-only mortgage to capital repayment, even if you’re fixed in for a period of time. Just call your lender and ask them to switch to repayment. They may want to check that you can afford the repayments on a capital and interest basis.

Equally, if you’ve come out of your fixed rate and you’re simply remortgaging, go to a mortgage broker for an assessment. We’ll do some affordability calculations and check you’re happy with what the payments are going to be. Obviously, you’ll be used to quite a low payment on interest only and your payments will increase on a repayment basis.

How do you calculate an interest only mortgage?

We’ll use an example. Let’s say you wanted a mortgage of £100,000 and the interest rate is 4%. You would type £100,000 in your calculator, times it by four and divide by 100.

That gives you the interest that you will pay over the year, which is £4,000. To get the monthly interest, you divide it by 12. So your monthly payment on that £100,000 would be £333.33. It’s as simple as that.

If you don’t want to do it that way, go online and find an interest-only mortgage calculator.
Just punch the numbers in and it will give you back your results.

Is an interest only mortgage a good idea? What are the advantages and disadvantages of an interest only mortgage?

An interest only mortgage is a good idea for the right client. It depends on the circumstances.

For example, people might buy a property in their thirties. They’ve got a couple of children and their outgoings are high. There’s a lot to juggle and they need a balance where they’re not burdened down with mortgage payments.

They might be buying your family home – the children are 10 years old and they are perhaps 35. They set up an interest only mortgage for 20 years because by that point in the future, the children are 30 and may have moved out. By then, the property has gone up in price and the clients could use that equity to downsize to something smaller, as they don’t now need a four-bedroom family home.

That’s a typical example of where someone might use interest only. Another situation might be to keep those payments lower until you reach a point where you can switch it over.

A junior doctor, for example, might get their first mortgage and want to keep the payments low. In two years’ time, they’re going to be qualified and their income will go up. At that stage, they could switch to repayment.

There’s different reasons why interest only can suit some people. It’s not for everyone. It depends on the individual circumstances.

Can I get an interest only mortgage at age 60?

Yes. We would ask you about your plans to make sure that at the end of the new term, you’ve got the means to pay the mortgage off. You might be prepared to sell the property and downsize at that point.

Sit down with a mortgage broker to weigh up all the pros, cons and risks. You don’t want to take on an interest only mortgage and then in eight years time you decide to retire, but you’ve got no income coming in and you’re left with that mortgage balance.

We want to know there’s enough equity in the property for you to sell and downsize – or you could potentially move to a Retirement Interest Only mortgage or equity release. That would pay off the interest only element of the mortgage.

The older you are, or the closer you are to retirement, the more important it is to be clear on your exit strategy. It’s right to avoid only having one option, which is to sell.

What are my options if I can’t repay the capital of an interest-only mortgage? Will the lender repossess my home?

I would hope not. Lenders don’t particularly like repossessing homes – that’s the very last resort. In this situation, there are options available. If you’ve come to the end of your interest only term with one lender, there may be another lender with different criteria that will allow the interest only mortgage to go on for a longer period of time.

That’s one option. Another option, depending on your age and your circumstances, is to move to a Retirement Interest Only mortgage or equity release mortgage. You also have the option to sell the property and downsize, using your equity to buy outright with no mortgage in place.

But lenders are quite good. If you’ve explained that you don’t have the money to pay off the balance, they will usually work with you. They may give you time to decide what to do next.

Anyone in this situation should consult a mortgage broker. We will put all of the options to you and guide you in the most appropriate way. Please don’t panic, because there will be a solution for you.

Lenders don’t want to repossess, but of course if you stop paying the mortgage payments altogether, you’ll go into arrears. That’s not going to put you in good stead. Just keep communicating with the lender, and talk to a mortgage broker about the options available to you.

What else do we need to know about interest only mortgages?

We’ve covered a lot today, but the key point is that these types of mortgages are quite specialist. If you’re not sure, please sit down with a mortgage broker. You’ll get really good value out of that.

Make a list of questions and concerns, write them all down and you’ll be prepared for your meeting. Get as much detail as you can and hopefully, you’ll be a lot more reassured.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS.

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