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The introduction of new rules for the mortgage market in April 2014 (as part of the Government’s Mortgage Market Review) have meant that, although the UK economy has recovered from its depression of 2008 – 2014*, lenders are now unwilling to offer mortgages on an Interest Only basis to many customers. If you took out an Interest Only loan before 2008, you will face problems in remortgaging on the same basis. On top of that, you need to develop a plan to pay back the original loan when it ends.
Here at Private Finance, we’ve seen an increase in phone calls this year from clients who are concerned about how they’re going to pay off the outstanding balance on their Interest Only mortgage and about how they can refinance their residential or investment property on the same basis. It’s certainly more difficult than it was, but it is not impossible, as long as you have equity of at least 25% of the value of the property, have a substantial income and can show a lender how you mean to repay the money borrowed, as well as the interest charged on it. (Unlike Capital Repayment mortgages, Interest Only mortgages require that you pay back just the interest each month. So, if you borrowed £500,000 for 25 years, the full £500,000 will still be payable at the end of the term.)
Are you finding it hard to find an Interest Only mortgage? Can you afford to switch to a Capital Repayment mortgage? Can you pass the new affordability checks?
Firstly, consult an independent mortgage adviser who will be able to tell you whether you can continue to borrow on an Interest Only basis with a different lender. If you need to change to a Capital Repayment mortgage, you may have to pass more rigorous affordability checks if you are switching lenders or even if you are remaining with the same lender. If you do switch, your payments will start repaying some of the capital as well as the interest, which means they’ll be higher every month.
Are you trying to work out how you can repay the capital on your Interest Only mortgage?
Talk to your existing lender – either directly or with the help of an independent mortgage adviser – and discuss your situation. You may be able to extend your mortgage term or switch to a Capital Repayment mortgage. Or you may be able to remortgage to a different lender entirely, maybe even on better terms. Some may allow you to sell a second home or other assets to ultimately pay off the mortgage capital. Other lenders will accept lump sum overpayments from savings accounts, a pension pot if you’re over 55, investment bonds, dividends from an investment portfolio or regular savings plans.
If you are looking for a substantial Interest Only mortgage, we recommend you take independent specialist advice from a broker who is used to regularly arranging such mortgages with specialist lenders, many of whom you will not find on the High Street or outside their regional base. It is likely to save you time and money and mean that you can afford to buy or remortgage your property on terms that suit your financial circumstances.
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*In Q2 2014, Britain’s economy finally regained and passed the peak level of output it reached before recession struck in 2008, according to Office for National Statistics, thus officially ending the depression. The recession itself – a period of falling output – lasted from Q2 2008 to Q2 2009 inclusive.