Interest-only mortgages
Unlike a repayment mortgage where your monthly payments gradually pay off the amount you borrowed (the capital) as well as the interest, with an interest only mortgage your monthly payments only cover the interest on the loan. They do not pay off any of the money you have borrowed. Money left owing at the end of the mortgage period (the term) is known as a shortfall.
You may have arranged to pay off the capital at the end of the term, by paying money into an investment or savings plan such as an endowment policy, Individual Savings Account (ISA), Personal Equity Plan (PEP), or you may have linked it to a personal pension. It is important to check your investment or savings plan regularly to see if it is on track to pay out its target amount.
If you haven’t made any arrangements to pay off the capital at the end of the term, you should think carefully about how you can do this and talk to your lender as soon as possible.
Do I need to take action?
If you think you may have a shortfall, you should consider taking action as soon as possible to make sure you can repay your mortgage. If you don’t think you can avoid a shortfall, there are options available to you.
How can I check if I have a shortfall for mortgage?
If you have an endowment policy, you should have received regular letters over the last few years telling you whether your policy is on track to repay your mortgage. These are called ‘re-projection letters’ and are marked ‘red’ if there is a high risk that the policy is not on track, ‘amber’ if there is a significant risk that the policy is not on track or ‘green’ if the policy is on track.
Endowment policies are linked to investments such as bonds and shares, which can vary in value. So make sure that you check each re-projection letter, even if the policy has so far been on track to repay the mortgage.
If you have an ISA or PEP you probably won’t get regular re-projection letters, but you can ask your product provider to give you an up-to-date projection of the value of your plan.
If you have a personal pension, your yearly statement won’t necessarily show you what your pension fund may grow to by the time you retire, so ask your product provider for an up-to-date projection of the fund. Remember that only part of a personal pension fund can be taken in cash to help pay off any loan.
Contact the provider if you are not sure where you stand on any of your investment or savings plans. You will need to continue to check the value right up to the time you repay your mortgage.
Never just cash in an investment or savings plan or stop paying in without taking professional advice – you could lose out financially.
Remember the following important points:
■ review your investment or savings plan regularly to see if it’s on track to repay your mortgage;
■ don’t delay – consider taking action now to make sure you will be able to pay off your mortgage – talk to your lender; and
■ if you can't avoid a shortfall, there are options available to you – talk to your lender.
Link to Previous article: Can’t repay your mortgage? What to do? -IV
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