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27 Apr 2019

Interest-only mortgage crisis: how can older borrowers repay their loan?

Tens of thousands of people could struggle to pay off their mortgages in the next five years

Nearly 400,000 people are due to repay their interest-only mortgage over the next five years - but around 250,000 won't be able to switch to a new deal, according to research from Kensington Mortgages.

Remortgaging is a popular method of paying off an interest-only mortgage, but a quarter of a million customers may not have that option, the research found.

These 'mortgage prisoners' will face a bill for their entire mortgage when their loan matures. And as these borrowers have only been paying the interest on their loan - not the loan itself - the amounts due could be in the hundreds of thousands.

Older homeowners or those already in retirement are likely to be hardest hit.

Read on to find out if you'll be affected, and what your options are for freeing yourself from an interest-only mortgage debt.

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How do interest-only mortgages work?

With interest-only mortgages, you only have to pay off the interest from month to month. This keeps your monthly payments low, but your loan balance stays the same size over the course of the loan.

When your mortgage comes to the end of its term, you'll need to pay back the full amount. You can do this by selling your home, paying with cash or remortgaging.

But for older customers in particular, remortgaging may not be possible.

While these loans have not been widely available since the 2008 financial crash, thousands of borrowers remain on interest-only deals that are now set to mature.

By 2024, Kensington forecasts there will be around 250,000 people who can't remortgage, and by 2029 this figure will grow to roughly 430,000. That's half of the 860,000 people whose interest-only mortgages will have come to term by that point.

Why can't interest-only mortgage prisoners remortgage?

The FCA recently loosened its rules on lending to help some interest-only mortgage prisoners switch to new deals. These reforms were intended to help homeowners who currently struggle to pass tight affordability checks.

Kensington's research, however, suggests borrowers approaching retirement will still face obstacles due to a lack of mortgage options for older borrowers.

According to Which? analysis of data from Moneyfacts, only one in ten mortgage products on the market has no maximum end-of-term age. For over a third of deals, you'll need to be 75 or under by the time your term ends.

Naturally, this will create problems for borrowers who will already be in their 60s and 70s.

If you can't pay back your interest-only loan by remortgaging, you may need to sell your property and move out. This is far from ideal for many homeowners.

Thankfully, there are other options you can consider.

Alternatives for interest-only mortgages

Retirement interest-only mortgages (RIOs)

A typical RIO mortgage works much like any interest-only mortgage, with your monthly payments covering the interest on the loan.

The difference is that you'll usually pay off the balance through the sale of your home after you die or move into long-term care. This will cut into the inheritance you leave to the next generation, but could help you stay in your home.

At first, the field was dominated by smaller building societies, but recently Nationwide entered the fray. There are now at least 20 lenders who offer RIOs or other later life lending products.

The RIO mortgage market is a complex area, so make sure you read our in-depth guide for everything you need to know.

Equity release and lifetime mortgages

If you have equity in your property - for example, because property prices have risen since you bought - you could consider equity release.

A lifetime mortgage allows you to, in a way, 'withdraw' money from your equity and cover it with another loan.

Like a RIO, a lifetime mortgage is payable through the sale of your house when you die or move into care. Unlike a RIO, you won't pay anything at all month to month.

The downside of a lifetime mortgage is that your loan balance will still accrue interest, which is added to the total you owe. This means the final amount you repay is likely to be much higher than your initial loan amount.

Overpay your mortgage

If you can afford it, overpaying your interest-only mortgage is a good way to prepare for the end of its term.

Say your interest payments are £500 a month. If you pay £600 a month instead, £100 of that will go towards paying off your mortgage balance.

This means that at the end of your term, you'll be faced with a smaller bill.

Many interest-only deals will charge you extra for paying early, so check first whether your mortgage has early repayment charges (ERCs), or limits on how much you can overpay each year.