It is time to consider your options when your interest-only mortgage comes to an end
It is estimated that there are up to 1.5m borrowers aged over 50 with interest-only loans who will be unable to clear the debt.
Many people will have invested in poorly performing funds or endowments that have produced a much lower than expected maturity value. In particular, mortgage endowments. Standard Life said that of 106,000 mortgage endowments maturing this year alone, nearly 104,000 would fail to settle the home loan debt.
Standard & Poor’s, the rating agency, recently warned that only 11% of interest-only borrowers will be able to refinance as their mortgages come up for renewal over the next 10 years, due to strict new rules, raising the prospect of forced sales and more downward pressure on prices.
Since the credit crunch lenders have been tightening their criteria in terms of what they will accept as a valid repayment vehicle and some have stopped approving interest-only loans altogether.
More lenders are clamping down on approving interest-only loans to edge out what is deemed riskier borrowing and favouring capital repayment.
Perhaps the most at risk are older homeowners who face a shortfall and without the capital to pay off the loan. Remortgaging to another lender will be tricky so it falls with your current lender to help where possible.
What are my options when my interest-only mortgage ends?
If you are in your 50s, you could ask your lender to extend the mortgage term to give you more time to build your investment. The regulator, the Financial Services Authority, requires lenders to treat customers fairly and make repossession a last resort so make sure you speak to your mortgage company at the earliest opportunity.
If you can afford the higher monthly cost, consider remortgaging to a repayment loan, so you pay back some of the capital as well as the interest each month. This may not be an option for some over-65s because of lenders' age restrictions. There is limited variance between lenders in the maximum age at the end of the mortgage term, with most limiting it to a maximum of 70 or 75. They will also want to see that the mortgage will remain affordable if it extends beyond the stated retirement age.
Nationwide, Halifax, Santander and Northern Rock, for example, allow you to borrow only up to the age of 75, NatWest and Woolwich will lend until 70.
David Hollingworth at L&C Mortgages, the broker, said: “National Counties building society does not have stated maximum age but will impose restriction on term dependent on age. However it has a long term fixed rate at 4.19% until November 2021, which must be taken over at least 10 year term. It is aimed at remortgages and is only available to 25% LTV but applicants up to 75 can apply, which would take them to a maximum of 85.”
But some lenders are reducing the age limit. Last month Leeds Building Society cut its maximum mortgage term for borrowers whose mortgage extends beyond their retirement age or their 70th birthday. Previously, Leeds BS would lend up to a maximum term of 40 years provided the mortgage ended by the time the borrowers reached 80 years old.
Using the equity in your home is an option to be explored in certain cases. Research by an equity release broker found that 36 per cent of its customers used the equity in their home to repay a mortgage during 2011, up 31 per cent on 2010. In the first two months of 2012, this trend had already accelerated.
Interest-only mortgages featured in a list of financial products that pose the greatest risk to their financial health in a damning report from the City watchdog the Financial Services Authority (FSA) back in March.
As a result banks have been reducing the availability of interest-only loans for new mortgages.