29 October 2012

Interest only mortgage holders should review their options

Home owners with interest only mortgages should review their options. With interest-only out of favour, repayment mortgages may offer better value.

Over one million interest-only mortgages totalling £116bn due for repayment by 2020 have no specified repayment plan. Many of these mortgage holders will have been making investments in order to clear their mortgages. The lending banks weren't interested in how you would repay and were happy to leave it up to you.

What's now worrying the FSA and the lenders, are the mortgage holders that didn't make a plan and have not been saving to repay their mortgage. The banks, having not recorded any specific repayment plan now don't know how many have saved enough and how many have not. This leaves the banks exposed to more bad debt and mass scale repossessions would make very bad publicity and could damage the housing market.

The political climate is now against interest only mortgages as being examples of irresponsible lending. This has resulted in a reduced number of lenders willing to offer them. Nationwide recently pulled out of the market saying that they had become a niche product.

With the lack of enthusiasm for the products from the lenders, many people with interest only mortgages may now find themselves on uncompetitive products. Swapping to a repayment mortgage may come with lower interest rates, especially if you have built up equity in your home. The value of investments that you have been making can also be registered against the new mortgage and treated in a similar way as equity.

If you do have an interest only mortgage you may want to review your options before the end of your existing mortgage term, especially if delaying would mean the new term would take you beyond retirement age.