Financial hardship may be caused by various events, like being made redundant, divorcing or living with low wages. During these stressful times, one option for property owners has been to have an interest-only mortgage. As this type of mortgage is risky, many lenders either refuse to offer them or will ask for a much higher deposit than usual, possibly 50 per cent. All lenders will expect to check that you have sufficient means to pay the outstanding loan at the end of the term, before agreeing to an interest-only mortgage.

Ways to repay the mortgage at the end of the term

An interest-only mortgage is one where you borrow money to purchase a property, but only pay back the interest each month. The initial amount borrowed is not repaid until the end of the term. It is usual to have something in place to guarantee repayment of the loan, and this can be done in various ways:

• Sufficient cash held in an Individual Savings Account or other account
• A regular savings plan in place, like an endowment policy
• A pension that will be available at the end of the term
• Unit trusts or shares
• Another type of investment or assets that could be sold to raise the money

If a person is relying on investments to repay the loan at the end of the term, it is crucial to regularly review performance so that they can ensure they are still on track to repay the loan.

Criteria for an interest-only mortgage

As a qualified mortgage advisor, you will have learned all about the various types of mortgage product while studying for your CeMAP qualification, including the interest-only option, and the criteria used for assessing suitability. To assess suitability, a lender will need to see how a person plans to repay the outstanding amount and what they have in place. Many lenders are using stricter eligibility criteria to ensure that the amount can be repaid. Larger deposits and a healthy salary are most likely to be required, along with a credible strategy for repayment.

Endowment shortfall

Many people took out endowment policies when they applied for interest-only mortgages. The endowment is expected to be sufficient to repay the mortgage at the end of the term. If a person believes that the endowment policy will leave a shortfall, they should take expert advice from a mortgage advisor. It may be possible to convert to a repayment mortgage, although this may increase the monthly repayments. It may also be possible to invest money in a different product to make up the shortfall.

As a qualified mortgage advisor, you will be able to help the client decide the most suitable course of action.

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