Since my divorce in 1990, I had to take on the payment of my mortgage.
I opted to pay my mortgage as interest-only as life was difficult, which has been the case for a long time.
My mortgage is with Mortgages PLC which has now informed me I still have £60.314.87 to pay off.
I am 69 years old. I was under the impression I had been paying extra, but the amount owed does not seem to have gone down. I’m worried as I’m not approaching the end of the mortgage term.
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I have asked if I can now do a repayment mortgage which means my payments will rise.
My lender says it will look at extending my mortgage term to make monthly repayments more manageable. What can I now do?
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David Hollingworth replies: Last year’s virtual postbag carried a number of enquiries that centred 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 could be in dealing with this scenario.
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How does interest-only work?
Interest-only mortgages largely do what it says on the tin and the monthly payment will only cover the interest on the mortgage each month.
This means that the monthly payments will be lower than if you had a repayment mortgage, where the monthly payments will gradually eat into the mortgage amount as well as covering the interest.
As you aren’t paying any capital back the mortgage amount will not reduce over time.
If you only make the standard payments, then you would 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 in the hope it will grow sufficiently to repay the mortgage when the term ends.
What are the risks?
There’s a risk that any repayment vehicle doesn’t grow as well as hoped, which could leave the borrower with a potential shortfall at the end of the mortgage term.
In other cases, borrowers didn’t contribute at all to a separate repayment vehicle, expecting that they would sell the property and repay the mortgage through the proceeds of the sale, which sounds more like your situation.
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Interest only: As you aren’t paying any capital back, the mortgage amount will not reduce over time
What are the options?
You are now nearing the end of the mortgage term and so your lender is expecting you to pay off the mortgage.
That clearly poses an issue unless there is a separate repayment vehicle or other savings in place that could pay off the mortgage.
You mention that you have been paying more when you can, so it sounds like you may have made some overpayments.
Overpaying is one approach to make inroads into the mortgage and will reduce the mortgage balance, which will in turn help to cut the interest bill. However, there is clearly a substantial amount still to be paid off.
Selling the property and downsizing could allow you to pay back the outstanding mortgage and still have enough to purchase a smaller home.
That will come with costs and it doesn’t sound like a move of house is your desired approach.
Switching to a repayment mortgage will mean that you will cut the mortgage balance each month and repay it over the remaining term. That will see payments rise and the shorter the remaining term the bigger the jump.
As the mortgage is close to the end of the term then you may need to extend the term of the mortgage to give you time to deal with the outstanding amount.
It sounds like you have already discussed this with your lender, which is positive but you should also consider if switching to another lender may be possible.
Mortgages Plc no longer offers new mortgages, so won’t be offering the best rates on the market.
Your age may limit the number of options, as lenders will often have a maximum age at the end of the term.
Others will be more flexible so it’s important to seek advice on whether there could be a better rate on offer from the wider market.
If you have been keeping up with payments and have a good credit history, switching to a new lender may allow you to extend the term and get a better rate, which would help reduce any increase in payments.
They will need to see that you have enough income to afford the monthly payments, now and looking ahead.
Rather than switch to a repayment mortgage a Retirement Interest Only mortgage may allow you to stay on interest only but the mortgage continue until you sell, die or move into long term care.
You’d have to be able to afford the monthly payments but it could enable you to extend the mortgage without worrying about the end of the term approaching in future.
There’s no easy answers here but hopefully that helps you to understand the situation. Consider all the options carefully to give yourself the best chance to pay off the mortgage.
> How to remortgage your home and find the best deal
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