Do you have an interest-only mortgage, or are considering taking one out to buy a home? If the answer to either of these is yes, you may be thinking about ways to make sure the mortgage is paid off in full at the end of the term and which would be best for you.
What is an interest-only mortgage?
With an interest-only mortgage, your payments are set up to only pay the interest that is added to your mortgage loan. At the end of your mortgage term, you still owe the full loan amount that was borrowed.
Having a repayment strategy
Because you’ll still owe the full balance when your mortgage term comes to an end, it’s important to have a plan in place to repay the loan to your lender. This is usually called a ‘repayment strategy’. There are a few options that you can consider using as a suitable repayment strategy:
Sell your property
Selling your mortgaged property could enable you to pay off the mortgage loan and use the money left over to buy a less expensive home. This is one of the most common repayment strategies because of a natural progression in circumstances (such as children leaving home or a decline in mobility) that make moving to a smaller home more suitable.
Switch to a capital repayment mortgage
If your repayment strategy is no longer suitable, you could switch to a capital repayment mortgage. This is this most common type of mortgage where the monthly payments go towards paying some of the loan as well as the interest, so by the end of the term the mortgage is paid in full. The monthly payments for a capital repayment mortgage are higher than an interest only payment because you’re paying off part of the loan amount as well as the interest.
Make overpayments
Many mortgage deals allow you to overpay as either a lump sum or in monthly instalments, which will help to reduce the balance of your mortgage over time. By the time the mortgage is due to finish, the loan amount will either be paid in full or reduced and repaid using an additional repayment strategy.
Savings
If you’ve built up a lump sum in savings or have a long term savings plan that’s due to mature, this could be used to repay some or all of the outstanding balance of your mortgage.
Pension lump sum
Some pension schemes offer the option to take part of the fund as a lump sum on maturity, which could clear some of all of the outstanding balance of your mortgage.
Equity release
If your mortgage is due to end and you don’t have another suitable repayment strategy in place, releasing equity from your current property to pay off the loan could be another option you wish to explore.
Expert advice
It’s beneficial to seek guidance from an expert before taking out any or paying off any kind of mortgage. A qualified mortgage adviser can recommend the best kind of mortgage to suit your needs and ensure that you’re starting journey in the best possible position.
If you’re looking to buy a home and need some mortgage advice in York, get in touch with us to see how our advisers can help you. Give us a call on 01904 819903 or send us an e-mail.