I suppose there needs to be another word included here – affordably.
If you have been on an interest only mortgage for a while then I imagine switching to a repayment mortgage is going to be a tough ask.
Here are 5 ways in which you can pay off your interest only mortgage.
- Switch to a Repayment mortgage
- Switch to part and part and part mortgage
- Overpay your current mortgage
- Downsize
- Win the lottery
Lets look at these in more detail.
Switching to a repayment mortgage
This is the safest option. It means your mortgage will be guaranteed to be paid off at the end of the term assuming you keep up with the repayments. The problem here is that you are likely to see a big jump in your repayments and most people might struggle with that financially or just mentally as it will likely mean a big change to your living standards.
But it can be a viable option for some.
Switching to a part and part mortgage
This is where part of the mortgage remains on interest only and part of it goes on to repayment. Your monthly payments will likely increase and your balance will gradually come down.
It is a little like a happy medium in that it gets you on the path of bringing the balance down without switching you over to much larger monthly repayments as above. It can mean that as you get pay rises over time, that you can switch more and more of it to repayment so that the increased payments are gradual.
However if that does not happen then ultimately at some point you are still going to have to find a lump sum and whether it is £50,000 or £150,000 if you do not have that money you still have the same problem.
Overpaying
This can be a good simple starting point. If you have some spare money, make an overpayment. It will all come off the balance which means it will bring your balance down. There is no commitment to make larger payments so can fit in well with people who maybe get regular bonuses or overtime etc.
The positive can also be a negative in that if there are no commitments to make overpayments, you may not do it and decide to spend money on a holiday, new TV etc. That can mean you get to the end of the term and you have not overpaid enough.
I think this can be a good starting point to get into the habit of overpaying, once you are used to making those monthly repayments, then switching to one of the above can ensure you do not find reasons to not make those overpayments.
Downsizing
We speak to a lot of people whose plan was to downsize when the time came. The time has come and they do not wish to downsize yet/ever. Depending on your situation at the time, there may be options. Usually if you have time of your side or enough equity (which is why overpaying can be worthwhile) there are options.
But for some, they do not have that option and have to do the one thing they do not want to do.
Downsizing might still mean you have a mortgage, maybe you want something a little more expensive than your equity can buy you and so you may want to keep a small mortgage in the background. That can be done.
Win the lottery
Not really the safest plan is it? Similar with inheritance, these are lump sums of money you cant really rely on. Families can fall out and that can result in years spent arguing and thousands in legal fees. Likewise with the lottery, it is not something you can rely on.
Summary
There are options.
Ultimately the money will need paying off at some point. Going from £500 pm to £1,500 pm is probably not feasible. It does not have to be a case of all or nothing. If you go from £500 to £700pm, you are still paying off £2,400 a year. If the following year you up to that to £800, that is £3,600. And then you also have the added effect of the lower balance accruing less interest which means you will actually be overpaying by more than that. It is like a snowball and soon starts to build momentum.
You might find as you are getting to the end of the term you still have a balance outstanding. But it is far easier to find options for £20,000 than it is £120,000. Your existing lender may even be happy to just keep your mortgage rolling on as they can see you have a history of bringing the balance down.
But lets have a chat if this is you. We can run the numbers, see where we are and start to formulate a plan to keep you back on track.