Guest post by John Lawson
Many working people between 25-35 purchase homes as soon as they qualify for a mortgage. Many individuals make purchases later in life. They may be looking for alternatives to pay the rest of their debt and the equity release companies to avoid when remortgaging.
What Is a Retirement Interest-Only Mortgage?
Retirement interest-only mortgages are designed for homeowners older than 55. You make payments against the interest with the capital only paid back once you have passed on.
There is also the thought of repayment and what you need to know if you cannot pay the total amount at the end of your term.
Is a Retirement Interest Only Mortgage Right for Me?
It is ideal if you have an interest-only mortgage, but there may be other reasons why it would suit you.
- If you wanted to use the extra money to pay off an existing mortgage.
- You may want to assist your children with funds for their new home or education.
- You could move into a smaller home to make retiring easier and use the money to purchase.
- To go on a long-awaited vacation.
- Renovate your existing home.
What Happens if I Repay My Retirement Interest Only Mortgage Early?
There could be penalties involved when you decide to pay off your interest-only mortgage early. An expert author on equity release, Jason Stubbs recommends crossing off all the checkpoints before applying.
It may be a better option for you to stick to the terms of your mortgage agreement and use the extra money to pay off other debt instead.
You could even use the extra cash to put onto a savings investment. Small businesses are rising, and you could start one with a cash injection.
How Long Do You Pay Off An Interest-Only Mortgage?
The term is usually between 5 to 10 years. You can refinance once the loan reverts to a standard schedule or pay significant amounts into the principal debt.
You won’t be building any equity with an interest-only mortgage. Once the interest is paid in full, you may have to pay more significant amounts on the principal.
The introductory period of the interest-only mortgage may keep the repayments steady, but the interest rate will vary when you return to principal payments.
How much does an interest-only loan cost per month?
If you are paying only the loan’s interest for the first 10 years, your repayment amount will change to the total amount of the outstanding monthly balance.
An interest-only loan of 2.5 – 3.5% interest rate during the first 10 years could nearly double once the interest is paid in full.
An interest-only mortgage of £180,000 with an interest rate of 3.5% would be £525 a month over 25 years, bringing you to £157,644 in interest paid.
However, when the repayments on the interest are made, you will have to pay the entire initial amount. Failure to do so could lead to your home being repossessed.
Are interest-only mortgages a good idea?
If you are disciplined in paying your debt, this won’t be a tough choice.
Interest-only mortgages are outstanding for people who receive bonuses at the end of each year. You could use the bonus to reduce the principal debt.
This type of mortgage could save you lots of hassle and money. You can use the extra cash to fund other necessities before paying the capital amount.
If you have completed all the payments and the principal in a short period, you can look at refinancing with another mortgage to ease your retirement.
Equity release could also assist with repayments on the capital.
What Kind of Legal Safeguard Do I Have for an Interest-Only Mortgage?
The ERC advises that you seek the legal advice of a registered attorney before you sign any mortgage.
Your broker needs to help you set a plan if you cannot afford to repay the mortgage. The Financial Ombudsman recommends receiving all the information you need on paper before settling.
Many complaints involve a lack of information so do your homework.
If you have the information, seek a second opinion to confirm that you have covered all your grounds. Once you sign the contract, you will not be able to change anything.
Do You Have to Pay Full Amount Back on an Interest-Only
According to the FCA, a client is responsible for the entire outstanding amount at maturity of the loan. Lenders are not obligated to renew the mortgage.
If you cannot afford to repay, you can ask your current lender to remortgage or apply for another interest-only mortgage with a different lender.
Can I Refinance Before My Mortgage Is Repaid in Full?
Yes. If you have repaid the total amount, you can apply for another interest-only mortgage or equity release.
Do all lenders offer interest-only mortgages?
No. If the lender does offer interest-only mortgages, you might need an approved repayment vehicle or a large deposit as part of the qualifying criteria.
Interest-only mortgages can offer many benefits, and for people who can afford the large repayment, in the end, they can be easy to manage.
An essential part of any loan application is constantly being confident that you can afford it.
There may be many benefits to taking out an interest-only mortgage, but check the fine print before signing your contract to avoid property loss or repossession.