Interest only mortgages – could part and part mortgages work for your customers?
In the second of our series exploring the options open to customers who have taken out interest only mortgages, we look at an example of some customers who could benefit by switching to a part interest only and part repayment mortgage.
Our example, Mr and Mrs Brown, are two professionals with no dependents, who purchased their flat in Bayswater in 1997 when the property market was at its peak for £300K. They took out a 90% LTV interest only mortgage, while their household composition was OK, the monthly affordability on their mortgage repayments was tight.
Mr and Mrs Brown went on quite happily in their property until the recession hit, which reduced the value of their property by more than £100K off the property and left them with an interest only mortgage in negative equity. Luckily, Mr and Mrs Brown’s jobs were unaffected by the recession, and they managed to maintain their mortgage repayments in much the same way as before.
Over the next few years, the pair stayed in their Bayswater home – they knew that if they waited, property prices would eventually bounce back and they were right. In the meantime, Mr and Mrs Brown’s overtime at the office has paid off, and their incomes have increased vastly since they took out their mortgage back in 1997. While house prices were at record lows, Mr and Mrs Brown paid capital repayments off their mortgage, which has left them in a good position. They now have a flat worth £400K, and a mortgage of £180K.
In theory, Mr and Mrs Brown could switch to a repayment mortgage straight away. However, in the nearly 20 years since they purchased their property they have become accustomed to a certain type of lifestyle, and switching from an interest only mortgage to a repayment mortgage could have the potential to nearly double their monthly mortgage payments. A flexible part interest only part repayment mortgage may be a good alternative, allowing Mr and Mrs Brown to gradually reduce the capital they owe, while allowing their monthly repayments to stay at a level they are accustomed to.
To help navigate the tricky waters of Interest only mortgages and the options open to customers, we will be sharing fictional examples of customers you might encounter as brokers and how they can best be advised. Check back for more case studies on the blog in the coming weeks, or discuss interest only mortgages with one of the team now by calling 03450 50 55 55.
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