Avoid a financial ticking time bomb
We’re all occasionally guilty of focusing too much on the here and now, and not looking at the longer term consequences of things, and this is particularly the case in the world of loans and mortgages.
The Citizens Advice Bureau has recently released figures suggesting that nearly a million people could face difficulties in paying off their mortgages, once their interest only periods come to an end.
The charity said that it was apparent that 934,000 home owners had not planned for how to pay back the loan at the end of the mortgage term, and with time running out for some to organise their finances, this could lead to some owners needing to sell or even have their homes repossessed if they are unable to find other funds.
This is a hangover from a time when millions of buyers were sold attractive interest-only mortgages before rules were tightened up in 2013. It allowed home buyers to enter into mortgages where they only had to pay back the interest accruing on the loan, without needing to pay off any of the actual loan capital itself. This meant the buyers could borrow more to buy their dream homes, and pay very little each month for doing so.
But there is no such thing as a free lunch, and the first wave of interest only mortgages entered into in the 1990s will soon reach maturity in 2017-18. At that point, mortgagees will be faced with paying back the original capital loan, and if they have failed to set aside savings over the years to do so, then their house could be at risk of repossession.
The second wave of interest only mortgages reaching maturity will be in 2027/28 as a result of the housing boom of the early 2000’s, and the final wave will happen in 2032, when the wild lending of the late 2000’s will reach a peak.
Switching to a repayment mortgage may be the most logical step in such circumstances. The age of the borrower and length of the mortgage will be a factor, especially for homeowners that took out such mortgages in the 1990s.
In the case of those who took out such mortgages in the late 2000’s, the loan to value rates will currently be quite high, and some mortgagees may well struggle to swap to monthly repayment mortgages until some of the loan capital has been paid off, and the loan to value ratio is improved. This may necessitate making overpayments on the current mortgages in order to bring the amount of the loan down.
Planning repayment of loans is something that a large number of borrowers are not particularly good at. It is, however, really important to look past the short-term incentives that any loan package may offer, and think about the long term consequences. Whether it be on a small scale such as credit cards or personal loans, or on larger mortgages and secured loans, planning the next step is really important to being top side of your debt obligations from the outset.
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