Mrs M asked:
I have an interest-only mortgage of £91,000 with 11 years left, with no plan to repay it at the end. It was originally a repayment mortgage, but when I couldn’t afford the payments the bank suggested I switch to an interest-only mortgage.
I went through with my bank an option to change to repayment but they didn’t accept me. Can I pay extra each month? Will it reduce the debt and not just the interest?
Interest-only (IO) mortgages are a major problem for hundreds of thousands of people. In 2018 the Financial Conduct Authority has been encouraging borrowers with interest-only mortgages to talk to their mortgage lender about their options. But this reader hasn’t had a very helpful response! Her bank may be right that she can’t afford a repayment mortgage, but what should she do?
I don’t know anything else about Mrs M’s situation but I can look at the typical options that someone may have in her position.
Four main options
With eleven years to go on her mortgage and having some extra money each month, Mrs M has four main options to think about. She is doing absolutely the right thing to look at the problem now – the longer it is left, the less time she has to take action!
Switch part to repayment
The reader’s bank has decided she can’t afford a repayment mortgage. But it may be possible to switch part of the mortgage to be a repayment mortgage. So Mrs M could say get a repayment mortgage for £60k and the remaining £31k could stay on interest only.
At the end of her IO mortgage, Mrs M would still have a problem. But owing less and with more equity in her house she will have better options at that point (new mortgage? equity release? downsize?) than if she does nothing at the moment.
Extend the mortgage
This option is most likely to work for someone whose IO mortgage is finishing some years before retirement. Say Mrs M’s mortgage ends when she is 61 and she expects to work until her state retirement age of 67 (check your state retirement age here). Her bank may think she can’t afford a repayment mortgage of 11 years, but could manage the repayments on a longer mortgage of 17 years.
Overpay the mortgage each month
This is what Mrs M is suggesting – if she can pay extra each month, this overpayment will start chipping away at the size of her mortgage.
Because her mortgage is going down, this in turn will in turn reduce the interest she has to pay, so this becomes a virtuous circle. MoneySavingExpert has a mortgage overpayment calculator which shows how much making overpayments will reduce your mortgage.
If she won’t be able to repay the whole mortgage by the time it finishes Mrs M would still have a problem. But as with the “part repayment” mortgage above, this will be a much smaller difficulty than if she does nothing at the moment.
Mrs M needs to ask her bank if she can make overpayments. If she has a fixed rate mortgage, overpayments are often limited to 10%. For a variable rate mortgage, there will typically be no limit. If she can overpay, she needs to be clear to her bank that she wants all overpayments to reduce the capital, not the term of the mortgage.
The simple way to make these overpayments is to change her standing order that pays the mortgage to a larger amount. But if her income is erratic, she could pay a different amount each month.
Save up the spare money
If none of the above will work, Mrs M can always start saving up the extra money she has each month. Get a “regular savings account” and set up a standing order to fund it each month. If she does this for 11 years, she will have a lump sum she can pay off the mortgage when it ends.
Other ways her situation may change
For all of these options, it’s useful to look at whether there is any way to increase the amount of money that could go to your mortgage and how these could change over the rest of the life of the mortgage. See the “Improve your finances” section in this other article: Options if you have an interest-only mortgage for some ideas.
It’s also good to think about combining options. If her bank will only allow her to have a repayment mortgage for 60k, she could still make overpayments to the remaining IO mortgage.
One of the reasons Mrs M may think she can afford a repayment mortgage and her bank may disagree is because the bank has to think about what will happen when interest rates increase. That will be a problem, but the timing and amounts of any interest rate increases are unknown. Every pound she pays off the mortgage now, when rates are low, will reduce the impact of interest rate rises in future.
What if her bank is wrong?
If Mrs M is convinced she can easily afford a repayment mortgage, she could put in a complaint to her bank and ask them to look again at it an. Or, if she has a good credit record, she could talk to a broker about whether she could remortgage with a different bank onto a repayment mortgage.
Get some help to decide
I’ve just looked at some common options here. It can be hard to make a decision on what to do, especially if your situation is complicated by the possibility of taking some money out of your pension or if you have a lot of other debts to deal with as well as your mortgage.
Pension Wise can give good information about taking money from a pension. Citizens Advice can’t give advice on what mortgage you should get but can help you look at general debt problems and your options for an IO mortgage.
And do talk to your mortgage lender! Even if you feel they will be unhelpful or your situation is hopeless. Your mortgage lender can’t force you to move to a mortgage you can’t afford and they can’t end your mortgage early if you don’t have a repayment plan.
Should you remortgage after a fix ends?
Selling the house – a hard choice
Your money needs a tool kit as well!
Sue says
Thank you for your sensible advice as always. We have an interest only mortgage we moved onto when I was made redundant and my husband had health problems a few years ago. Our bank were spectacularly unhelpful despite us never missing a payment and refused any assistance at all, although they now contact us on a regular basis asking how they can “help”. I had to take out an IVA which ends soon and now our children have left home we have two potential solutions, either downsize with a small short repayment mortgage (I have about 5 years until retirement and my husband has ten years) from a more sympathetic lender, as my income has increased considerably, or buy outright in a cheaper area.
Sara (Debt Camel) says
ah the IVA is a complication – good it’s ending soon. You will be able to get a mortgage after that and all the debts in it have gone from your credit record (see https://debtcamel.co.uk/repair-credit-record-iva/) but you must go through a broker, as some lenders may refuse because of the IVA.
The choice of small mortgage/nicer area vs mortgage-free – it’s hard. It would be such a pleasure to own your house with no mortgage and to enjoy your extra income… but you will be living in the house a long while. It may come down to the individual properties as much as the finances.
Angela Taylor says
This is honestly friend of mine.
Self employed car mechanic disabled wife, its Coronavirus year and they’re due pat £168 back IOM in property value £665-725
They are worried they won’t sell in time and frightened to give lender the ‘headsup’
Any advice please apart from equity release
Sara (Debt Camel) says
who is the lender? they want to sell and downsize/move somewhere cheaper?
Amy says
We (my husband and I) are self employed and have interest only mortgage with over 2 years left on our mortgage term with Santander. We have taken all of the SEISS Covid grants. We’d like to move but realise we can’t until our mortgage term finishes. Would it help us to overpay?
Sara (Debt Camel) says
Are you convinced your income will be “back to normal” in a few months?
What was your plan for when the mortgage ended if it hadn’t been for covid-19?
How urgently do you need to move?
Will you be able to afford a repayment mortgage when you move?
Amy says
Thanks for the speedy response! We have done a lot of work to our house and have a lot of capitol in it and would like to move ASAP to do the same to another property (we also have 2 BTL in the background). While we have 2 young children we would like to add value to properties and then eventually downsize and sell our BTLs. We would be able to have a repayment mortgage but just wanted our monthly outgoings as low as possible in order to save too. We could overpay if that would help us be able to move sooner or if it helped us in the long run?
Yes, business is getting back to normal we are sole traders in a partnership if that means anything?
Sara (Debt Camel) says
OK so I can’t give you financial advice. You should probably talk to an IFA about your plans. Some points for you to consider:
– I have lost count of how many people have told me they originally planned to downsize but now they love the house, love the garden, have all their friends in the area, have remodelled it how they like it, need the space for the family to come at Christmas and for the grandchildren to stay over the holidays etc etc If downsizing is a major part of your retirement planning I suggest you look at other options as well.
– it may be worth taking a hard look at the BTLs where the tax treatment is now a lot less favourable. If selling one could mean you need a lot smaller mortgage on your own house this should be considered.
– work out what a repayment mortgage would cost on the new place you want and think about overpaying your current mortgage so you are paying that much. Do that for 6months + and you are showing a lender that you can afford it. (Obviously I am assuming you can overpay the mortgage – have you checked?)
– both of you working in the same small business looks very risky to a mortgage lender.
How large a mortgage do you need? And how much equity would there be in the new house at the start?
James says
The bank Lloyds were a lot more helpful than I expected.
My interest only mortgage came to an end in May 2020, I was stuck overseas at the time due to the Covid lockdown with covid and airports closed.
The bank gave me until September 2020 to get back to them.
In September 2020 they agreed a hold off until May 2021 in order for me to fix up my house and sell it, there were some delays due to a fall though in two sales as the buyers could not raise enough money so the bank extended my mortgage with normal interest payments until October 2021, I sold and move out of the property in June 2021.
So in affect they gave me 19 months to sell with no penalties and with the same interest payments and no pressure at all, no letters or phone calls from them, they just let me get on with selling the house hassle free.
I now have a very sizeable cash amount in my bank account allowing me to buy a smaller but still a sizeable house here in the South East with cash so it worked out well.