Don’t let an interest-only timebomb hit your home

Around one in five homeowners could be sitting on an interest-only mortgage timebomb.

This type of loan was popular in the early Noughties, as they kept monthly repayments low. Unlike a traditional repayment mortgage, you have only to pay the interest each month. 

The idea is that you then save enough money via another vehicle over the course of the loan to clear the original debt in one lump sum at the end of the 25-year mortgage term.

But scores of these 1.67 million borrowers have no idea how they will repay their loan when the time comes.

Many were sold stock market-linked investment plans alongside their mortgage that were supposed to cover the debt.

But many of these so-called endowment policies have performed dismally, leaving homeowners with a substantial shortfall.

Others were told that fast-rising house prices would enable them to build up enough equity in their home so that when they sold it at the end of the term, they would be able to clear the loan and have enough left over to downsize to a smaller home.

But in some parts of the country, house prices have failed to soar as high as buyers hoped, while others who had planned to sell have found they don’t want to leave their family home.

Around 85,000 interest-only loans are due to finish this year.

The City watchdog has warned that if homeowners don’t act, they could lose their homes.

Here, we reveal sensible steps you can take to avoid disaster . . .

BANKING ON HELP

If you are worried about how you will repay your debt, call your lender. It will be able to tell you exactly when your loans matures, how much you owe and what your options are.

Banks have been told by regulator the Financial Conduct Authority that they must treat interest-only customers fairly.

This means they must make an effort to contact borrowers nearing the end of a mortgage term to ensure they have a plan in place to pay off the loan.

If you don’t have a plan, lenders should work with you to find a solution. Repossession should be a last resort.

Get advice: If you are worried about how you will repay your debt, call your lender. It will be able to tell you exactly when your loans matures, how much you owe and what your options are

EXTEND YOUR LOAN TERM 

Some lenders will allow interest-only borrowers to extend the term of the loan, giving a few extra years to come up with the cash. How much time you get will depend on your age and financial circumstances.

Others will let you switch to a repayment mortgage, which means your monthly repayment will go towards the interest and the capital, so you will be debt-free when your mortgage term ends.

To do this, you must provide details of earnings or income from pensions and investments to prove you can afford the repayments.

In the past, banks and building societies have refused to lend to borrowers over age 60 or 65, as this is when people typically give up work. But as people now work for longer, many firms now offer loans up until the borrower is aged 70.

Some specialist lenders, such as the Family Building Society and Marsden Building Society, have age limits of up to 90 — though rates may be higher.

TAP INTO SAVINGS

It’s important to have money set aside for a rainy day, but if you have thousands of pounds in savings, you might use some to clear your debt.

Isas, Premium Bonds and investments can be cashed in at any time. Check for early exit fees or charges to access your money.

If you have an endowment policy, find out what it is likely to pay out when it matures, so you have an idea of any shortfall to cover.

If you are approaching retirement age, you may want to use the 25 per cent tax-free lump sum you can take from your pension to clear the mortgage balance.