The Fixer: interest-only mortgage shortfall
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I am in a mess with my interest-only mortgage, which runs out when in eight years when I am 65.
The outstanding debt to be paid on the mortgage is £67,000, and as I only have about £5,000 in savings, I expect to fall short of the full amount by some £45,000 unless we take action now. The house my 57-year-old wife and I live in is worth £120,000.
We have no other debts and have never missed a mortgage payment, but we our worried that our lender could throw us out on the street if we cannot repay the mortgage in full when the time comes. Can you help?
M Morton, Ilkeston
Dear Mr Morton,
With interest only mortgages, you only cover the monthly interest, so there needs to be an alternative repayment strategy in place to cover the capital.
For many people, this is a separate savings or investment plan. However, if you do not have a savings plan in place, or the one you have is too small to cover your mortgage, you will have to find another solution.
One option is to switch to a repayment deal now. But switching the current balance of £67,000 to repayment over the remaining seven year term would mean your monthly payments increasing from £216 a month to around £900 a month.
If that is unaffordable, lengthening the mortgage term could help to reduce the monthly payments necessary, as could shopping around for the lowest possible interest rate (as long as there are no early repayment charges on your current deal).
Many lenders will now allow you to borrow until the age of 70, for example, although you will have to prove that you will have enough income to meet those payments in retirement if you plan to stop working in the meantime.
If none of these options proves suitable, you and your wife could also sell the property and downsize.
David Hollingworth at broker London & Country Mortgages said: "This is not a simple issue to deal with, but it is one that will be easier to take on sooner rather than later.
"Consider whether downsizing to a smaller property at retirement might be a possibility, allowing you to pay off the mortgage and buy a new home." Hope that helps.
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