Repaying your interest-only mortgage

The payments on an interest-only mortgage are lower than those on a standard repayment mortgage because they only cover the interest due. At the end of the mortgage term, you will still owe the original amount you borrowed. Nevertheless, interest-only mortgages are popular, particularly for buy-to-let borrowers and for those who believe their earnings will increase. When inflation is on the rise, it erodes the real value of the capital sum over time; however, you will still have to find a way to pay back the money you owe at the end of the term.

There are a number of different options for repaying your loan. Perhaps most obviously of all, you could simply sell the house and use the proceeds to repay it. This might be an acceptable option for buy-to-let or holiday properties, but could prove impractical for your own home, as it would force you to move. More importantly, it also carries the risk that the price you receive could be lower than the amount you borrowed, leaving you with a shortfall. It might also take time to find a buyer and, once a sale is finally agreed, it can take several weeks, or even months, to complete.

Therefore, the most sensible option is to raise a lump sum to pay off your original loan. Most people opt to build up a lump sum over the life of the mortgage by drip-feeding money into a savings plan. In the past, endowment policies were a common option; however, they proved expensive and lacked transparency, resulting in shortfalls for which investors were not prepared. More recently, therefore, ISAs and unit trust investment products have taken over as popular choices. Both offer value for money, flexibility and a wide choice of investments; in addition, ISAs provide tax efficiency, although they are subject to a maximum annual investment limit (£20,000 in 2017/18). An average 25-year term means you have plenty of time to make the most of the market, and shrewd investments might even leave you with more than you need.

However, as with any stock market investment, there are no guarantees. It is possible that the stock market could fall, leaving you with less than you need. Therefore, if you can’t take the risk, you might be better off with the security – and the predictability – of a formal repayment mortgage.

YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.