The press is always full of articles relating to interest only loans and how they are bad etc. However, they are only bad for those people that have not managed them properly.
First of all, I do not mind recommending interest only mortgages to people, who understand they have to wipe the debt and they have x amount of years to do it i.e. £100,000 mortgage with 25 years to repay means you pay around £4000 a year off to get to zero in 25 years; therefore if you have an interest only loan, you put away £4000 a year, then at the end of the 25 years you will hopefully have the capital to be mortgage free.
If you want an interest rate loan, please only do this if you have an investment strategy. The financial services industry carries the stigma of poor advice being given to clients who were pushed to take out interest only mortgages by unscrupulous mortgage advisers, when property was growing at circa 10% per annum. However on the flip side, these people now have a house, and its probably grown in value for some of them so they have benefited from a rise in equity. These people should now think about reverting to a repayment mortgage, unless they want to pay their mortgage off via an investment strategy such as:
- Collective Investments such as unit trusts etc.
- Other property to sell to repay loan;
- Any other type of investment.
I would always tell clients on an interest only loan, make sure its an offset mortgage. This is when you can still pay your savings into the plan; therefore if you have a £100,000 mortgage, and £20,000 in savings, then you only pay interest on £80,000.
If you were one of those unlucky people to have been mis-sold by your adviser, then look at making a formal complaint with the Financial Conduct Authority, and if you have not managed the mortgage properly, then take action before its too late.
The reality is on the day your mortgage is due to be redeemed, if you do not have the capital to pay the mortgage off, you will be forced to sell your house, and will more than likely incur interest, and the wrath of the lender.
Whatever your situation always go and seek advice from a professional adviser to be able to see what are your options, such as:
- Extending the term;
- Selling other investments, if it is appropriate to do so;
- Using the lump sum from your pension;
- Altering the mortgage to a repayment mortgage, if you are not on track.
Please be aware this column is not providing you with financial advice; therefore in the event that you feel you require advice, either contact me through the paper or another adviser.