New research by Leeds Building Society shows £16 billion-worth of interest-only mortgages will mature this year. This sum is covered by almost 136,000 mortgages of this type. Meanwhile, more than £50 billion is due to be cleared by interest-only mortgage holders by 2020.
According to the research, there are around 1.6 million mortgages of this type in the UK today. The research also shows lots of people who hold these mortgages are taking the necessary steps to ensure the capital is paid off on time.
What is an interest-only mortgage?
As the name suggests, this type of mortgage requires the holder to pay off only the interest on the mortgage each month. Alternative arrangements are then put in place to ensure the capital amount borrowed can be cleared by the end of the agreed term.
In the past, concern has been raised over the way this is done. Some people took out endowment products only to find they had not matured fast enough to cover the capital at the time it became due. However, the research from Leeds Building Society does indicate many people are exploring their options and putting strategies in place to cover the lump sum they require to clear their mortgage.
Considering repayment strategies
“Many prospective homeowners don’t look beyond a repayment mortgage when looking to buy their own homes,” said Darren Pescod, managing director of The Mortgage Broker Ltd. “We expect most people to stay with repayment mortgages, but it is good news to see that those who already have them are working to ensure they can pay them off when they are required to do so.”
Tougher lending rules apply just as readily to interest-only mortgages as they do to repayment mortgages. This means anyone considering the option of an interest-only mortgage must be able to prove they can pay it off by the required date.
“Many mortgages on the market today are of the repayment kind,” Darren Pescod added. “Many banks and building societies do however offer their own ranges of interest-only mortgages, which does give the prospective homeowner more to think about. Professional advice on mortgage types is a good idea for anyone considering purchasing a property. Interest-only mortgages may suit some, but they won’t be right for everyone. It’s important to assess the figures just as you would for anything else.”
Reassessing mortgage types
It should also be noted that some people start with an interest-only mortgage and switch to a repayment mortgage later. Some of those whose mortgages are falling due soon may consider a switch from the interest-only model to a repayment mortgage. However, no two situations are identical, and no two people will be in the same financial position.
The most important thing is to assess your situation if you do have an interest-only mortgage that is due to be repaid in the next few years. Make sure you have an adequate plan in place to repay the mortgage capital, or take steps now to make sure this is the case.
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