Here’s a warning if you’ve an interest only mortgage. One day, you’ll going to have to pay back the original capital you borrowed. If you haven’t got a savings plan in place to cover that, you could be facing a big bill when your mortgage matures.
Interest-only mortgages are when you simply pay the interest back on your homeloan every month but not the actual capital you’ve borrowed. Because of this, the monthly repayments on an interest only loan are cheaper than on a repayment. With a repayment mortgage you pay back both – so at the end of the mortgage term you owe nothing.
But with an interest-only mortgage when it comes to the end of the term you need to pay back the capital you originally borrowed. According to the Financial Conduct Authority, 17.6% of homebuyers are on interest-only deals. Five years ago, it estimated that 1.3 million people would reach the end of their interest-only deal with an average shortfall of £71,000 because they’ve not got the savings or investments in place to repay the capital.
Apparently, many borrowers have ignored letters from lenders warning them that they need to have a plan for repaying the capital. If you’ve an interest-only mortgage, then if you can afford the higher monthly costs, you should switch to a repayment deal. The monthly costs might be higher but in the long run, it’s going to save you a headache when your homeloan matures. Ask your lender – or a good fee-free mortgage broker – and while you are at it, you can remortgage to a better deal too. There are some great offers around at the moment: check out www.thisismoney.co.uk or www.moneyfacts.co.uk to see what’s on offer.
And check out our guides to mortgages here.