Interest-only mortgages are few and far between these days – for new borrowers.
But an alarming number of people are still repaying their home loan on this basis without the means to pay them off.
What are interest-only mortgages?
Interest-only mortgages allow deferred capital repayments. Borrowers simply repay the interest each month, and the balance is due when the mortgage finishes.
For lots of borrowers, the hope was that rising house prices over the long term would mean they built up sufficient equity to be able to more than repay the mortgage.
Others invested in schemes which have failed to reach targets of return leaving a devastating shortfall.
Tens of thousands of older borrowers are expected to be hit by a shortfall in their endowment policies. These stock market-linked savings plans were sold through the 1980s and 1990s with interest-only mortgages, but many have since produced dismal returns.
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How many people are affected?
Almost 2m of the over-50s potentially face hard times, according to figures from the Saga Equity Release Advice Service. Around 1.8 million over-50s with an interest-only mortgage say they intended to pay it off with an endowment policy but this is not going to be enough to pay their mortgage off in full.
While interest-only loans, which formed part of the clampdown on irresponsible lending, were popular in the 1990s through to 2007, lenders pulled out in droves when the credit crunch hit to reduce the risk of bad debts.
But that doesn’t help the people stuck on these loans today, many of whom are approaching the end of the loan with an average shortfall of £34,500 to pay.
Did you know your credit report can affect the cost of borrowing?
What can I do if I can't pay off the balance?
Homeowners who will be affected in the near future need to act fast.
Here are the options:
It is possible to negotiate a restructure of the loan to extend the mortgage term to give more time to build up investments or switch to capital repayments.
This is easier said than done for the over-50s in some cases, as banks and some building societies were denying older customers new and cheaper deals, forcing them to remain trapped in loans with higher interest rates.
However, following recommendations from the Building Societies Association in 2015, there was a review on maximum age limits and now some building societies will lend up to age 80, 85 or 95, while a number of building societies have removed their age limits all together.
In some cases, using a mortgage broker can also help because they can navigate the market and negotiate with the more flexible lenders. You can find an independent mortgage broker at unbiased.
It's not just age that can affect your ability to get a mortgage. Find out more
This makes sense where children have left and bedrooms are empty.
More than 2.5m people intend to raise extra cash by swapping the family home for something smaller and more manageable.
However, a home half the size won’t be half the price in the same neighbourhood. Downsizing works best if you own a pricey property and relocate to a more affordable region.
Read our guide to downsizing
Use your pension
If you are over 55, you could use the tax-free lump sum from your pension.
If that’s not enough, you could take advantage of the changes to pension rules which were initiated back in 2015, and raid your pension fund further. But bear in mind that money must last as long as you do, so perhaps make this a last resort.
You should also remember that you’re taxed on withdrawals as income and you might be pushed into a higher tax bracket which can perhaps be avoided by straddling two tax years.
Many people will raise cash to pay off their mortgage using equity release plans. These plans allow the over-55s to borrow against the value of their homes, where the interest accrues and the loan is paid back when the house is sold – either when the owners move into care or pass away.
It's becoming increasingly popular – back in 2018, 38,912 households aged 55 and over used equity release products from members of The Equity Release Council to unlock wealth from their homes.