It may seem a long way off, but the end of your mortgage term will be here before you know it and that’s when you will have to repay your loan in full. So, it is important to have a strong and robust repayment strategy in place for when that day comes.
Why you need a strategy
If you have an Interest Only mortgage with us (whether part or fully Interest Only), this means your monthly payments are paying off the interest but will not pay off the loan itself, and if the loan is left unpaid at the end of your mortgage term this can leave you in a very difficult position.
Your home may be repossessed if you do not pay the full amount on the date we agreed. You can also be taken to court to recover any additional shortfall if the sale price of your property does not cover the loan. Although possession action will only ever be taken as a last resort after all options have been explored.
If you don’t have a strategy
Speak to us today. We can help you develop a repayment strategy that’s right for you and guide you through the options that fit in with your circumstances.
If you do have a strategy
You may be worried your repayment strategy won’t be enough to repay your loan, so we’ll look at your current strategy, review the options and ensure any shortfall is covered in time.
Remortgaging to another lender
If you do not want to sell your home and are planning to remortgage elsewhere, it’s important to remember that many banks and building societies are now applying much stricter criteria for new lending, meaning some types of mortgage are now much harder to come by. This is especially true at present for Interest Only mortgages.
Depending on your financial situation and the amount of equity available in your property, this could mean that your remortgage options in the future are much more limited. Those deals that do exist may also be more expensive than you expect.
Speak to an independent mortgage advisor to discuss your options.
Selling your home
If you plan to pay off your original loan by selling your home, you need to ensure all the sums add up. Make sure you know when the right time is for you to sell and what financial situation you will need to be in to secure your next property. This could mean buying another house or moving into rented accommodation.
You must consider the effect any drop in the value of your property might have on the sale price you can achieve. House prices won’t necessarily rise during the remainder of your mortgage term and you could be forced to sell during a dip in the market. If you sell for less than you planned, you could be left with a shortfall on the amount you owe. It could also take longer to sell your property than you anticipated so you need to keep an eye on the pace of the housing market in your area.
If you are planning to sell, talk to us about your plans. We can help make sure you’re fully prepared to get the most from your sale and are in the best place possible to buy another property or move into rented accommodation.
Using savings or investments
If your plan is to pay off your mortgage using savings or investments (such as an endowment or pension) it is important that you review them at least once a year to make sure they’re on track. This is vital in the current economic climate – as interest rates remain low and stock market performance can be volatile. Otherwise, you could reach the end of your mortgage term and find yourself with less than you need.
Your statement should show if there might be a shortfall in the amount you’re expecting. If this is the case, don’t worry, there are several ways you can plan to address this. Call us and we will talk you through your options.
Switching all or part of your mortgage to repayment
Switching all of your mortgage to repayment
With an Interest Only mortgage, your monthly payments only cover the interest on the current balance owed. Your payments are not reducing the balance of the loan you originally borrowed. However, you can opt to pay off the loan balance gradually, over the full term of your mortgage, rather than in a single payment at the end. You can do this by switching to a Repayment mortgage.
With a Repayment mortgage, as long as you stay on track with your monthly payments your mortgage will be completely paid-off at the end of the term, so you will eventually own your property outright.
Switching to Repayment will increase your monthly payments, but the additional amount could be less than you think.
Switching a part of your mortgage to repayment
If a full switch to a Repayment mortgage costs too much, then you may consider changing just part of your mortgage to Repayment, whilst keeping the remainder as interest only. This is called a Part & Part mortgage.
The increase in your monthly payments will be less than with a full switch to repayment, so this option could be more affordable. And if your financial situation improves in the future, you can always increase the portion of your mortgage on repayment, and 'step up' your monthly payments to increase the amount of your loan that you will gradually be paying off.
With a Part & Part mortgage, whilst you will not pay off your entire loan over the term of your mortgage, you will reduce the balance you owe. This could help if you are facing a shortfall from your savings or investment plan, or if you eventually sell your property in the future for less than you expect. Alternatively, if you are thinking of remortgaging to another lender, reducing your balance could be beneficial as this might help you increase the equity in your property and potentially give you more remortgage options.
Please contact us to discuss how Part & Part may work for you.
Making overpayments can be a great way to improve your financial position. Each overpayment reduces your mortgage balance and therefore the interest you are charged over the term of your mortgage. Even small overpayments can add up and make a big difference to the total amount of interest that you will pay. If you have other outstanding debts, like credit cards or personal loans, consider if it would be better paying these off first - especially if the interest rate being charged on them is higher than your mortgage.
If you can't afford to make regular monthly overpayments, you can always just do this as and when you want to. For example in those situations when you might find yourself with surplus cash, an extra bonus or some spare savings. It's quicker and easier to use Self-Serve to start the overpayment process online, or you can contact us.