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Mortgage Shortfall Fears

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Mortgage Shortfall Fears

The new Financial Conduct Authority has suggested that approximately 2.6 million people will not have saved enough money by the time their interest only mortgages mature to repay them with the average shortfall being in the region of £71,000.

With a repayment mortgage this situation cannot arise if all payments are made on time. This is because each repayment consists of interest and capital repayments.  Over the course of the mortgage, capital is gradually repaid and the final repayment will clear the mortgage loan.

With an interest only mortgage the interest on the loan is paid during the term of the loan and it is necessary to repay the capital sum at the end of the mortgage term.  It is therefore necessary to plan a strategy to repay the capital element of the loan at the end of the mortgage term.  Some borrowers however have not made provision to repay the capital, preferring to deal with the issue when the mortgage is due for repayment.

Whilst many people realise they may have trouble repaying their mortgage the FCA estimates that many borrowers underestimate the problem and up to 260,000 people have no plans in place at all to repay their mortgage loan.

To try and raise awareness of the issue, lenders have agreed to contact their customers who have an interest only mortgage maturing before the end of 2020 to highlight the repayment requirements and to give the opportunity for borrowers to review their repayment plans.

There are several options available to repay an interest only mortgage on repayment, these include:

Sale of the property.  This might be an option where children have left home and the parents are content to sell the family home, to repay the mortgage and use the equity released to purchase a smaller home.

Repay the mortgage from accumulated capital.  This capital may have been received by way of Inheritance (this cannot be relied upon) or from savings set aside during the term of the mortgage or perhaps from ‘tax free cash’ from a pension scheme.

Transfer the mortgage to a “lifetime Mortgage”.  This type of mortgage has the advantage of not having an end date.  The mortgage is simply repaid after the borrower has died, usually from the sale of their home.  It is possible to either pay the interest on a monthly basis or to add it to the loan, effectively meaning that no repayments are required.  This can be particularly useful where income levels have fallen due to reduced income in retirement.  It can still be useful to have built up some savings to reduce the mortgage debt however before switching to a lifetime mortgage because lenders will not usually lend more than 30% of the property value to somebody aged 65.

If you have concerns about how to repay your mortgage or would like to discuss repayment strategies, Graham Westhall at SWLaw Investment and Financial Planning Ltd will be pleased to offer you a free ½ hour consultation.  Graham is a chartered financial planner with over 25 years’ experience of financial services.