[vc_row][vc_column][vc_column_text]
Should I switch to a Repayment Mortgage?
Many people who are looking to switch from their existing mortgages to a repayment mortgage currently have an interest-only mortgage. First time buyers or buy-to-let investors are likely to have opted for an interest-only loan at the outset because the relatively low payment of interest appears very attractive, and this is understandable.
With this type of mortgage, the borrower only pays the interest on the loan, but is not required to repay the original sum borrowed. However, the disadvantage comes at the end of the mortgage term, when the borrower will still owe the original amount of the loan, and this will need repaying somehow – either by selling the property or from raising money by other means. The responsibility for repayment of the loan falls squarely on the shoulders of the borrower, not the lender.
In 2013, the FCA reported that over two million interest-only mortgages will be due for repayment in the next 30 years. Moreover, a staggering 10 per cent of these borrowers have no plan in place to enable them to repay the outstanding loan.
It is likely that among these two million people there are those who are depending on rather risky solutions to rescue them from financial embarrassment.
Many people will be relying on an increase in property prices that will allow them to downsize and re-pay the loan with the profit they make. Others may play the stock market. Either method may lead to disappointment.
However, there are some more astute people who are aware of the pitfalls of their interest-only mortgage. These are the people asking if they should switch to a repayment mortgage.
The biggest advantage of a repayment mortgage is when the loan period ends, the property belongs to the borrower. The reason for this is that the monthly repayments not only pay the interest but also some of the loan itself. In the early stages of the mortgage, the majority of the repayments go towards paying the interest and only a small proportion of the loan. The amount by which the loan is reduced increases over time and by the end of the payment term the loan is paid in full.
This way there is no large mortgage debt left to be paid off, and no resulting impact on other investments which might otherwise be called upon. No need to down-size and therefore the need to move out of the property. Instead, complete peace of mind with the borrower takes complete possession of the property.
This is a very good reason for people with interest-only or similar mortgages to switch their mortgage to a repayment one.
It would therefore be financially prudent for anyone with an interest-only mortgage to switch their mortgage to a repayment plan later on, if they can afford it. It would be a relatively small sacrifice each month to ‘chip away’ little by little at the capital sum due to be repaid, but this will have a worthwhile benefit in the longer term. The less capital that remains outstanding, the less interest there will be to pay on it, so the capital sum will reduce quite dramatically in the latter years of a repayment mortgage.
Paying interest-only on a mortgage throughout the whole term – without making any effort to at least begin to pay down the capital – could be considered wasteful, in a similar way in which paying rent is wasteful, in that the borrower/tenant is making no headway in the property market, merely servicing a debt. Similarly buy-to-let landlords on interest-only mortgages should make efforts to pay down the capital element of the loans, rather than rely solely on selling the property at a profit at the end of the mortgage term.
If monthly payments on a repayment mortgage do pose a problem, they should explore the option of switching just part of their loan to a repayment mortgage.
So, the answer to the question ‘Should I switch to a repayment mortgage?’ is Yes.
But, everyone’s financial situation is different, and it is vital that you should take independent financial advice.
There is plenty of it out there, so take advantage of it.[/vc_column_text][/vc_column][/vc_row]
