What can I do if I can't pay off my interest-only loan?

admin
7 September 2015

Q

I am a retired 65-year-old with an interest-only mortgage. It has 16 years left but I already know I will not have the money to settle the mortgage at the end of the term. What can I do? Could my daughter and son-in-law be added to the mortgage to help pay it off?
From
RK/Worcester

A

One of the concerns with interest-only mortgages is that borrowers will reach the end of the mortgage term only to find that they cannot repay the capital that they borrowed in the first place. You should have had to take out some form of investment that would be used to clear the capital but there is often a shortfall between what the repayment vehicle is worth and how much you owe on your home.

It may be possible to switch part of the mortgage to repayment over the remaining term. You would have to pay a bit more each month but not as much as if you switched the whole mortgage.

If you haven't been contributing to a repayment vehicle, then there are various options. A switch to repayment over the remaining term would pay the mortgage off over time but will mean higher monthly payments. It makes sense to see if the rate can be reduced to mitigate any increase.

Downsizing could be an option if it's feasible to sell the property, pay off the mortgage and leave enough equity to buy a smaller home. It's important to factor in the other costs of selling and buying a property when considering the figures but it could leave you free of any mortgage borrowing.

Extending your borrowing beyond the original term will not be easy to do. Lenders will clearly want to see that the mortgage will be affordable based on your income.

However, many impose a maximum age of 70 or 75 at the end of the mortgage term. Some smaller building societies may be able to consider lending beyond those limits.

If there is not enough income, then it could be possible to transfer some equity to your daughter and son-in-law. They will need to take into account their own mortgage, as well as other outgoings, to ensure it will be affordable. As you would remain on the mortgage, your age could still prove to be a limitation. You should also seek advice on the inheritance tax position, which will be complicated by the fact that you will still benefi t from the property.

Finally, another option you could consider is an equity release scheme to raise enough to pay off the mortgage. There are no monthly payments to be met on the equity release scheme but interest will roll up over time, so it is important to consider all the implications and discuss with family members.

David Hollingworth is a mortgage expert at London & Country Mortgages in Bath.