I am 69 and have an interest-only mortgage of €60,000. What options do I have? DAVID HOLINGWORTH replies
Since my divorce in 1990, I had to pay for my mortgage.
Because life was difficult, I chose to pay my mortgage interest-only, which has been the case for a long time.
My mortgage is with Mortgages PLC, who have now informed me that I still have £60,314.87 to pay off.
I am 69 years old. I was under the impression that I had paid extra, but the amount due does not seem to have gone down. I’m worried because I’m not near the end of the mortgage term yet.
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I have asked if I can now take out a repayment mortgage, which will increase my payments.
My lender says he will look at extending the term of my mortgage to make the monthly repayments more manageable. What can I do now?
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David Hollingworth replies: Last year’s virtual mailbag contained a number of questions about interest-only mortgages.
Hopefully, by going back to the basics of interest-only, it will help you understand how it works and what the options might be to deal with this scenario.
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How does repayment only work?
Interest only mortgages largely do what it says on the tin and the monthly payment only covers the interest on the mortgage each month.
This means that monthly payments will be lower than if you had a repayment mortgage, where monthly payments gradually eat up the mortgage amount while covering the interest.
Because you do not repay any capital, the mortgage amount does not decrease over time.
If you only make the standard payments, you will still owe the same amount at the end of the mortgage term.
The traditional approach is to have an alternative repayment vehicle that you also contribute to, hoping that it will grow enough to pay off the mortgage when the term expires.
What are the risks?
There is a risk that a repayment instrument may not grow as well as hoped, leaving the borrower with a potential shortfall at the end of the mortgage term.
In other cases, borrowers did not contribute to a separate repayment instrument at all, with the expectation that they would sell the property and repay the mortgage with the proceeds of the sale, which is more similar to your situation.
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Interest only: Because you do not repay any capital, the mortgage amount does not decrease over time
What are the options?
You are now approaching the end of the mortgage term and therefore your lender expects you to pay off the mortgage.
This clearly presents a problem unless there is a separate repayment instrument or other savings with which to pay off the mortgage.
You mention that you paid more when you could, so it seems like you may have paid too much.
Overpaying is a way to invade the mortgage and reduce the mortgage balance, which in turn will help reduce interest costs. However, a substantial amount still needs to be paid off.
By selling the property and downsizing, you can pay off the outstanding mortgage and still have enough left over to buy a smaller home.
That entails costs and it doesn’t sound like a move is the desired approach.
Switching to a repayment mortgage means that you reduce the mortgage balance every month and pay it off over the remaining term. This will cause payments to increase and the shorter the remaining term, the bigger the jump.
Because the term of the mortgage is about to expire, you may need to extend the term of the mortgage so that you have time to pay off the outstanding amount.
It sounds like you’ve already discussed this with your lender, which is positive, but you should also consider whether switching to another lender is possible.
Mortgages Plc no longer offers new mortgages and therefore does not offer the best rates on the market.
Your age may limit the number of options, because lenders often apply a maximum age at the end of the term.
Others will be more flexible, so it is important to seek advice on whether a better rate can be offered in the wider market.
If you have kept up with payments and have a good credit history, switching to a new lender may give you the opportunity to extend the term and get a better rate, which would help reduce the increase in payments.
They will need to ensure that you have enough income to pay the monthly payments, now and in the future.
Instead of switching to an interest-only mortgage, an interest-only mortgage may allow you to continue paying only the interest, but the mortgage will continue until you sell, die, or move into long-term care.
You must be able to afford the monthly payments, but it can also allow you to extend the mortgage without worrying about the end of the term approaching in the future.
There are no easy answers here, but hopefully this will help you understand the situation. Think carefully about all your options so you have the best chance of paying off the mortgage.
> How to remortgage your home and find the best deal
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