Mortgages.scot

Interest-only mortgages are not new, they have been around for a long time. When I first took out my mortgage it was offered as an option either as pure interest-only or with an endowment, more on that later. I have had a question recently that has a homeowner in a very difficult position that many have either faced in recent years or are about to face.

I took out a mortgage in 2000 for £100,000, it was offered on an interest-only option as it was the cheapest when it came to monthly payments. The mortgage ends in 2025 and at that point, the bank wants the £100,000 paid. I don't have that kind of money. When I took the mortgage out the promise was that the property value would go up enough in 25 years that I could sell it and buy something else mortgage free with the amount I would have. That is not going to happen. I could probably get £185,000 for it today. Interested in your view on options.

Your Options

To get straight to the point, your options are very limited. You didn't mention your age in your email, however, you did make note of retirement in a few years so I am going to infer that you do not have time to take out a new mortgage on a repayment basis in order to repay the £100,000. On that basis, you have one, maybe two/three options at best.

1. Sell the house.
2. Look at a lifetime option.
3. Sell and look for a local authority property.

If you sell the house at the suggested value of £185,000 which after costs let's say gives you £80k back it is something which is better than nothing. Whilst it appears you are close to retirement, you didn't say when. Is it possible you could take that £80k, and buy another house with a small mortgage on a repayment basis?

For example, buy something at £120k which would require a £40k mortgage which depending on how many years you have left and your income, could be repaid in a short period.

Again age dependent you may qualify for a lifetime mortgage that could release enough money to repay the £100,000 and allow you to remain in the property. Some lenders will allow that today without having to go and look for another. Have you contacted your lender to discuss this?

The final option would be to sell the home but in advance of that approach your local authority and see what they could offer you. You may need to go on to a waiting list for some time but you have a couple of years left on your mortgage so there is time available to wait.

These are options based only on what you have told me. As always it is really important you get professional advice to explore all options, there may well be something else you can look at once someone is able to understand your full position.

Lender Communication

Lenders have been required by the Financial Conduct Authority (FCA) to contact clients on interest-only and remind clients they need to have a strategy in place. In some cases, lenders are allowing clients to move on to a lifetime mortgage arrangement. If you have not had contact with them, get in touch now and discuss any options they may have.

Endownment Policies

Back when I took out a mortgage the option of interest-only was very common but supported by an endowment policy. Essentially you only paid the interest on the loan to the lender but also paid an amount to an insurance company. The idea was that it was cheaper than a regular repayment mortgage.

Over the term of the mortgage, the expectation was that the premiums you paid to the endowment policy would be invested, and the fund would grow and pay off your mortgage. There was often the expectation the endowment would not only pay off the mortgage but give you money back.

It was established many years ago that the endowments were not going to cover the mortgage. Many ended up cancelling the policy, using the balance of the fund to pay down some of the mortgage and then switching what was left to repayment.

Anyone who still has an endowment policy should know and for quite some time now that there is likely to a be shortfall if that is still being relied upon to repay the mortgage.