When you arranged it – probably many years ago – you might have thought an “interest only” mortgage sounded ideal. It offered a way to pay less on your monthly mortgage amount as you only paid the interest amount over a fixed time (as opposed to paying both the interest and part of the capital every month as you do with repayment mortgages). At the end of this period, you would then repay the capital you borrowed.
You may have put a savings vehicle in place at the time so you could repay the capital when required - for example, an endowment mortgage which is intended to repay the capital sum on maturity. Or you may have planned to sell the property at the end of the term, and repay any capital then from the proceeds of the sale.
If you took out an interest only mortgage, it made sense to have a firm idea of how you planned to make the final capital repayment at the very beginning. Things can change however …
Endowment policies shortfall
Conventionally, one of the principal ways of preparing for the day you have to repay the capital on your interest only mortgage was through an endowment policy.
This gives you a means of saving by way of a life insurance policy which offers a guaranteed cash payout at the end of the insured term, which is typically written to coincide with the maturity date of your interest only mortgage.
Endowment policies have come in for some bad press, a raft of consumer complaints, and some that were taken out in the 1980s and 90s are no longer expected to pay out the amounts originally expected, warns the Financial Ombudsman Service (FOS).
Other savings and investments
Alternatively, you might have planned for a regular savings account, any investment bonds or all or part of your investment portfolio eventually to cover the amount of capital needed to pay off your mortgage.
You might even need to use a substantial part of your pension pot to make the capital repayment – but this, of course, is likely to severely deplete the funds on which you had planned to retire.
Some borrowers may have convinced themselves that when one interest-only mortgage comes to term, it might be possible to arrange a further, new interest only mortgage – so putting off the day when the capital needs to be paid off. An alternative might be a new standard repayment mortgage.
The problem with both solutions is that they are likely to be difficult, if not unattainable, the older you get.
For many people, it can be a worry – after all, you have quite happily been making the interest payments for 30 years or so and were looking forward to the end of the mortgage, as you approached or were into your retirement years, with nothing more to pay.
Like a lot of financial planning, the sooner you start, the wider your options. So important is the concept that the Chartered Institute for Securities and Investment (CISI) holds an annual “financial planning” week to try to raise awareness.
Probably the most significant source of capital equity available to most homeowners nearing the end of any type of mortgage is the home in which they live.
Rather than selling the home, downsizing and moving to a new house, you might want to consider equity release. This is a tax-free arrangement available to the over 55s and one that helped a record number of homeowners release a total of more than £3 billion in 2017, according to a report in the Telegraph newspaper on the 25th of January 2018.
Chasing the booming popularity of equity release there are more and more providers, all offering different terms and conditions, so it is imperative to compare equity release plans very carefully and take independent financial advice before making any commitment.
There are two ways of achieving equity release:
- one involves selling a part or whole share in your home to the equity release provider, who lets back the property to you for an agreed rent, so that you may continue to live there until your death or until you move out into long-term residential care;
- the more popular variant is the so-called lifetime mortgage – which does very much as it says;
- your home is mortgaged to the equity provider in return for a cash lump sum (which you may use to pay off the capital on your interest-only mortgage), and you continue to live in your home just as before;
- instead of repaying any interest or capital, however, both are rolled over from year to year and due for repayment only upon your death or until the property is sold when you move into long-term residential care.
Both home reversion and lifetime mortgage equity release solutions have an impact on any expectations for the inheritance of your property by your children. The solution may not be a suitable solution for everyone, and you are again encouraged to compare equity release options and to seek the advice of an independent specialist.
How much equity could you release?
Considering releasing equity in your property and interested to see how much you could get? Then use our free equity release calculator here, provided in conjunction with Age Partnership.