What is an interest-only mortgage, how to calculate your rates and how does repayment work?
INTEREST-ONLY mortgages are loans where you pay back only the interest each month and you don't reduce the size of the debt you owe.
This means that your payments are much lower than if you took out a repayment mortgage where every month you make inroads into clearing the debt.
But when you reach the end of an interest-only mortgage term – which is the deadline by which your loan must be repaid (normally between 25 and 30 years)– you will have to hand the property back to the bank unless you have another way of paying the lump sum.
An elderly couple in their seventies are facing eviction from their home of 17 years after Santander has refused to extend their mortgage.
Len and Val Fitzgerald, who are 77 and 76, now face a £180,000 bill after their interest-only mortgage has come to an end because they can't pay the money they owe outright.
Here's all you need to know about interest-free mortgages.
What is an interest-only mortgage?
Around one in five borrowers, or 1.67 million people, have interest-only mortgages.
Tens of thousands of these loans will need to be repaid over the next few years.
The City watchdog warned earlier this year that a "significant number" of people are facing shortfalls and are "at risk of losing their homes."
The Financial Conduct Authority (FCA) has referred to the crisis facing these borrowers as a "ticking time bomb".
The problems are worst for borrowers who are approaching retirement and will not be allowed to remortgage due to their age and the fact their income will drop when they stop working.
Who are interest-only mortgages for?
Interest-only mortgages are only suitable for borrowers who have substantial savings or investments which they could use to pay back the loans when they fall due.
But in the nineties and 2000s these loans were widely sold to borrowers who had no means of paying the loans back other than by selling their homes.
People opted for interest-only mortgages to keep their payments low and to allow them to borrow more.
In some cases it was the only way borrowers on low incomes could afford to get onto the housing ladder.
But some people did not understand they would not own their homes at the end of the loan term
Other borrowers were sold investments by the bank alongside their home loans called "endowments".
These were meant to grow over time so that borrowers could pay off their mortgages, but most of these investments failed to perform as well as expected leaving borrowers with a substantial shortfall.
In 2007 just before the global financial crisis, as many as a third of all new mortgages were sold on an interest-only basis.
This figure has fallen to just 4 per cent of all new mortgages today, after regulators raised concerns and lenders were forced to take a more cautious approach.
Can you still take out an interest-only mortgage?
YES, but it is much harder than it used to be and you must have a plan in place to pay back your mortgage.
Lenders may be willing to accept the following types of investment as a strategy for repaying your mortgage:
- Cash in savings accounts
- Stocks and shares Isas
- Pensions
- Investment bonds or funds
- Shares
- Other properties that you
Banks will want to make sure that your plans are realistic and they will check on the performance of your investments.
What can you do if you have an interest-only mortgage?
If you have an interest-only mortgage it's important to act as soon as possible and not to bury your head in the sand.
Speak to your mortgage lender and see if you can afford to switch to a repayment mortgage.
If you have enough time left before retirement, it may be possible to extend the term of your mortgage in order to give you more time to pay it back.
It is also worth speaking to an independent mortgage broker to see if you are able to switch to another lender with a lower rate.
This would allow you to put more of your monthly payments towards repaying the outstanding debt rather than just covering the interest costs.
A broker will also be able to help you to find lenders that have higher age limits.
Many lenders require borrower to pay back their mortgages by the time they reach 75, but others are more flexible so long as borrowers have enough pension income to keep up their payments.
David Hollingworth, of broker L&C, says: "It makes sense for those with interest only mortgages and no repayment plan to consider their options sooner rather than later.
"Halifax, Leeds Building Society and Skipton will lend to borrowers up to age 80.
"Nationwide Building Society and Bath BS will consider lending to borrowers up to age 85.
"Hodge Lifetime is a specialist in the equity release market but has recognised that a lifetime mortgage may not be for all.
"It has developed a mortgage product for those over 55 which can run until age 95 at the end of the term."
If your house has grown substantially in value since you took out your mortgage, you may be able to sell and still have enough after paying back the bank to buy a smaller home.
Missing a mortgage payment could lead to you having your home repossessed, but here's how to get help if you're having financial problems.
If you're a first time buyer and looking for some advice, we've put together a round up of some of the best mortgage rates for when you're buying your first home.
Some lenders are offering a no deposit mortgage which might help you get on to the property ladder.
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