Homeowners with interest-only mortgages who could face a shortfall in their repayment plans should take action or contact their lender as soon as possible to discuss their options.
The city regulator the Financial Conduct Authority (FCA) is urging anyone who hasn’t already spoken to their lender to do so sooner rather than later, to reduce the risk of them losing their homes if they’re unable to pay back what they owe.
Nearly one in five mortgage customers in the UK, equivalent to 1.67m people, have an interest-only mortgage, whereby they only repay the interest they owe on the capital sum borrowed each month. The capital is only paid back at the end of the mortgage term, so customers must ensure they have sufficient savings in place to cover this.
Many people with interest-only mortgages are less affluent homeowners who converted from repayment to interest-only mortgages several years ago, and whose mortgages are due to mature in 2027-28 and 2032. The FCA is concerned that this group is at particular risk of shortfalls.
What can I do if I don’t have a repayment plan?
Those who don’t have enough savings to repay their mortgage capital will need to look at alternative options, such as switching to a repayment mortgage, where both interest and some of the capital are paid back every month.
This will mean higher monthly payments but provides peace of mind that there won’t be anything left to pay back at the end of the mortgage term. Taking action sooner rather than later will help reduce any increase in payments and make a shortfall easier to deal with in the longer run.
For example, someone with a £100,000 interest only mortgage with 20 years left to run, paying interest at 2.5%, would currently be paying their lender just £208.33 a month in interest. If they switched to a repayment mortgage at the same rate, monthly payments would increase to £529.90 a month.
Leaving it for another five years and moving to a repayment mortgage when there is only a 15-year term left would mean monthly payments would rise to £666.79 a month. If the mortgage is switched to a repayment basis with only 10 years left to run, monthly payments would increase to £942.70.
Seek out the best deals
Facing steeper monthly payments may seem daunting if you’re switching from an interest-only to a repayment mortgage.
However, the good news is that thanks to current low interest rates there are plenty of competitive mortgages to choose from. Seeking out the best possible deal could mitigate the higher cost of switching some or all of your mortgage to a repayment basis.
Remember to factor in all the associated costs of any mortgage, such as arrangement or booking fees, as well as looking at headline rates. Seek professional help if you’re not sure about which deal is likely to be best for you based on your individual circumstances, or if you need advice on ways to ensure your mortgage capital will be repaid.
Interest-only borrowers warned to take action