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Since my divorce in 1990, I had to pay my mortgage.
I chose to pay my mortgage with interest only because life was difficult, as it has been for a long time.
My mortgage is with Mortgages PLC who have informed me that I still have £60,314.87 to pay off.
I am 69 years old. She was under the impression that she had been paying more, but the amount owed did not appear to have decreased. I am worried because I am not close to the end of the mortgage term.
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I have asked if I can now afford a mortgage, which means my payments will increase.
My lender says they will consider extending the term of my mortgage to make the monthly payments more manageable. What can I do now?
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David Hollingworth replies: Last year’s virtual mailbag contained a number of queries focused on interest-only mortgages.
Hopefully, going back to interest-only basics will help you understand how it works and what your options might be to deal with this scenario.
> What’s next for mortgage rates? Should they be fixed for two or five years?
How does the interest-only system work?
Interest-only mortgages largely do what they say on the tin, and the monthly payment will only cover the interest on the mortgage each month.
This means that your monthly payments will be lower than if you had a repayment mortgage, where the monthly payments will gradually reduce the amount of your mortgage in addition to covering the interest.
Since you are not paying back any principal, the mortgage amount will not reduce over time.
If you only make standard payments, you will still owe the same amount at the end of the mortgage term.
The traditional approach is to have an alternative payment vehicle that you also contribute to in the hope that it will grow enough to pay off the mortgage when the term is up.
What are the risks?
There is a risk that any payment vehicle will not grow as well as expected, which could leave the borrower with a potential shortfall at the end of the mortgage term.
In other cases, borrowers did not contribute to a separate payment vehicle at all, hoping to sell the property and pay off the mortgage with the proceeds of the sale, which is more like your situation.
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Interest only: Since you’re not paying back any principal, your mortgage amount won’t reduce over time.
What are the options?
You are now approaching the end of the mortgage term and therefore your lender expects you to pay off the mortgage.
This clearly poses a problem unless there is a separate payment vehicle or other savings that can pay the mortgage.
You mention that you’ve been paying more when you can, so it sounds like you may have made some overpayments.
Overpaying is a way to make progress on your mortgage and will reduce your mortgage balance, which in turn will help reduce your interest bill. However, it is clear that there is still a substantial amount to pay.
Selling the property and downsizing could allow you to pay off the outstanding mortgage and still have enough to buy a smaller home.
That will have costs and it doesn’t seem like moving house is the desired approach.
Switching to a repayment mortgage will mean you will cut your mortgage balance each month and pay it off over the remaining term. That will cause the payments to increase and the shorter the remaining term, the bigger the jump.
As the mortgage is near the end of its term, you may need to extend the term of the mortgage to have time to pay off the outstanding amount.
It sounds like you’ve already discussed this with your lender, which is positive, but you should also consider whether it’s possible to switch to another lender.
Mortgages Plc no longer offers new mortgages, so will not offer the best rates on the market.
Your age may limit the number of options, as lenders will often have a maximum age at the end of the term.
Others will be more flexible, so it is important to seek advice on whether there might be a better deal on the wider market.
If you’ve stayed current on payments and have good credit, switching to a new lender may allow you to extend your term and get a better rate, which would help reduce any increase in payments.
They will need to prove that you have enough income to meet the monthly payments, now and in the future.
Instead of switching to a repayment mortgage, an interest-only retirement mortgage may allow you to remain interest-only, but the mortgage will continue until you sell, die, or move into a long-term care facility.
You would have to be able to afford the monthly payments, but it could allow you to extend the mortgage without worrying about the end of the term approaching in the future.
There are no easy answers here, but I hope that helps you understand the situation. Consider all options carefully to give yourself the best chance of paying off your mortgage.
> How to remortgage your house and find the best offer
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