A common question we hear is what are the options available if you're unable to pay off your interest-only mortgage.
This article will look at the equity release options, such as lifetime mortgages and retirement interest-only mortgages - that are available for 'mortgage prisoners' looking to repay their interest-only mortgage.
What is an interest-only mortgage?
According to the Money Advice Service, with an interest-only mortgage, 'your repayments only cover the interest on the amount you borrowed.'1 This differs from a repayment mortgage, which involves monthly repayments that cover the interest and some of the capital. As a result, interest-only monthly payments are smaller.
At the end of your mortgage term, a repayment mortgage will be cleared whereas those with an interest-only mortgage will have to pay back what was borrowed in one lump sum.
What is a mortgage prisoner?
A mortgage prisoner is someone who is unable to leave their current mortgage due to a change in financial circumstances.
In relation to an interest-only mortgage, if you are unable to present a repayment plan to pay back the outstanding mortgage at the end of its term, new lenders are unlikely to let you switch products, effectively trapping you in your current mortgage.
The Later Life Lending solution to an interest-only mortgage
For those borrowers who are unable to pay off their interest-only mortgage and don't want to downsize and sell-up to raise funds, there are ways of releasing some of the value of their home to repay the outstanding debt. There are two main options available:
Lifetime mortgage(Equity Release): this popular form of equity release can give you access to up to 50% of the value of your home. As such, it's a great option for cashing in on rising property values. With this option, there are no monthly payments and the amount your release (plus interest) is only due after you pass away or move into a long-term care facility.
Retirement interest-only mortgage: if you have a retirement income you can depend on, this product may be an option for you. With this option, there are no monthly payments due but you will have to continue paying interest. Again, the balance is only due after you pass away or move into a long-term care facility.
Both options have Equity Release Council safeguards and guarantees in place to ensure your home is not at risk from repossession, or falling into a negative equity situation where you owe more than your home is worth.
Want to know more?
Choosing to access your property wealth is a huge decision so we recommend getting professional advice from a financial advisor before considering any equity release product.
To help you find out more, here is our myth-busting guide to equity release and our latest response to the query 'Can you release equity on your property during a lockdown?'
If you are considering equity release options, please contact us today for independent and ethical advice.