Reader Question:
I have an interest-only mortgage which I took out a number of years ago. As you can imagine with the cut in interest rates my monthly payments have fallen from £900 a month to just over £200. But I've been reading about how lenders are pulling all their interest-only deals and am worried that we might be forced off ours onto a repayment mortgage. Can they do that? Or is there anyway to stop them?
My response:
The headlines you refer to relate to new borrowers or existing borrowers looking to remortgage. So no you can't be forced to move off your interest-only mortgage, as long as you stick to the terms of your deal. But if you want to borrow any more money or move house then there is no guarantee that any associated mortgage will be on interest-only terms.
You don't say who your mortgage is with and I'm guessing that you are on the lender's standard variable rate (SVR) now. So a word of warning, depending on your mortgage deal and its associated small print your lender may be able to increase their SVR despite the Bank of England Base Rate, which it will reference to, not moving.
In addition, at some point the Base Rate will have to normalise from its artificially low rate, currently 0.5%. In both instances your monthly mortgage payment will go up. So your cheap mortgage won't last forever and you will have to repay it in full at the end of your mortgage term, given that you are on an interest-only deal. Do you have a credible plan to repay the debt? I'd argue that simply banking on your house to soar in value and then downsizing is not a safe plan. Do you really want to be downsizing at a time when you are likely to retire and have more time to enjoy your life and home?
If you don't have a credible plan of how to repay your mortgage then you should speak to a financial adviser.
I hope that helps
Best Wishes
Damien
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I’d add that whilst the rates are low it would be worth continuing to pay at a higher rate as you could significantly reduce the balance before interest rates go up. That would mean your future payments would still be lower than before. For example, say you had a £100,000 mortgage on interest only at 6.5% = £6,500 per year or £542 per month. Rates dropped and now you are on the lenders Standard Variable rate (SVR) of 4%. Your payments are now £4000 or £333 per month. If you continued paying £542 per month for 3 years you would have overpaid by around £8,000 reducing the balance to £92,000. If your rate goes back to 6.5% at that point you would pay £5,980 or £498 per month. Obviously the more you actually overpay the better it is for you in the long run.
In addition it would mean that you would find an Interest rate increase less difficult in future as it would not mean you had to increase payments until the rate reached the equivalent to what you were actually paying.
One word of caution though. If you are on SVR there is likely to be no restriction to overpayments. If you are still in a deal (which seems unlikely) you may be restricted to overpayments of perhaps 10% of the anniversary balance in any year. i.e. £100,000 mortgage max overpayment £10,000 in that year. The following year the balance might be £90,000, so you can only overpay by £9,000 in that year.