If you have an interest–only mortgage, you may have arranged to pay off the capital at the end of the term by paying money into an investment or savings plan such as:
- an endowment policy;
- an Individual Savings Account (ISA);
- a Personal Equity Plan (PEP); or
- a personal pension.
If your investment or savings plan does not grow enough to meet its target amount, you may owe your mortgage lender a large amount of money when the mortgage term finishes. You need to check your investment or savings plan regularly to see if it is on track to pay out its target amount.
If it isn’t, you should make plans now to make up the shortfall. Below are some ways you can do this, and you can use more than one.
Ways to make up a shortfall
- Make changes to your mortgage by:
- asking your lender to switch part of your mortgage equal to or greater than your projected shortfall to a repayment mortgage; or
- asking your lender to convert your whole mortgage to a repayment mortgage; or
- repaying part of your mortgage early by paying off a lump sum, by overpaying each month, or by extending the term of the mortgage to allow more time for your savings or investments to grow.
- Start an additional investment or savings plan by:
- using a cash savings account; or
- using a stocks and shares ISA to pay off the shortfall.
- Make changes to your existing investment or savings plan by:
- extending the term; or
- topping up your plan by paying in more each month.
There are pros and cons to all of these options and some offer more certainty than others. Always take advice if you are not sure which option is right for you.
What if I can’t avoid a shortfall?
Firstly, when your investment or savings plan pays out at the end of the mortgage term, you should pay all the money into your mortgage to find out exactly how much you still owe the lender. You then need to look at how best to pay off the shortfall.
Talk to your lender as soon as possible. You may have a number of options available to you, including paying the shortfall from savings you have elsewhere, or discussing a new repayment period with your lender to pay the shortfall. The quickest way may be to carry on with your previous monthly payment, although you may be able to agree a lower payment over a longer term. You should avoid extending the term beyond your retirement, unless you’re sure you can afford it.
In general, provided you keep up the new agreed monthly mortgage payments, you should not lose your home as a result of the shortfall.