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Reducing payments on an interest only mortgage

If you have an interest only mortgage (linked to an investment such as an endowment policy or ISA) it may be possible to reduce your monthly payments to make it more affordable.

If this isn't possible, you may be able to sell your investment to pay off some of your arrears or switch to a more flexible mortgage. You could also consider asking your lender to add the arrears to the rest of your mortgage. When you are working out your options, it helps to look at your mortgage interest payments and your investment (usually an endowment or ISA) separately.

Getting help to negotiate with your lender

You will have to negotiate to get your lender to agree to any changes, and you normally have to pay an arrangement fee. Depending on which option you choose, you will have to negotiate with your mortgage lender and/or the company that manages your investment. This can be complicated. You can get free advice from the National Debtline, a Money Advice Scotland, a housing aid centre, the Citizens Advice Bureau or other advice agency. Many have specialist advisers who can help you negotiate.

Reducing mortgage interest payments

Your lender may accept reduced interest payments for a short while if, for example:

  • you are trying to sell your home
  • your problems are short term and you will be able to meet the full interest and investment (endowment or ISA) payments in the near future
  • you need to keep up your investment payments if the policy is due to pay off your mortgage in the near future
  • you need to keep up your investment payments (including life insurance) because either you or your partner has a life-threatening illness.

If you are eligible to receive income support, income based jobseeker's allowance or pension credit, you may be able to get extra payments to help pay your mortgage interest.

Reducing investment payments

If you've been paying the endowment premiums for a long time you may be able to make an agreement to stop payments (called 'freezing the policy') for a short while. You will have to catch up with missed payments later on. Your lender and the insurance company will usually only agree to this if your problems are temporary.

It may be possible to reduce the monthly payments on the endowment policy, pension or ISA that is linked to your mortgage by switching to a new one. The size of the reduction usually depends on the type of policy you have now and the one that you switch to. There will be fees and risks involved, so you need to get independent financial advice before making a decision.

Adding the arrears to your mortgage

It may be possible to add any arrears you have to the rest of your mortgage ('capitalise the arrears'). It will mean that you can pay off any payments you have missed over the rest of the mortgage term. You will probably have to make higher monthly payments.

You can normally only add your arrears to the rest of your mortgage when your financial situation improves. Most lenders will usually expect you to meet your regular mortgage repayments for at least six months before they will agree to it.

Selling your investment

You may be able to pay off some of your mortgage by selling your investment. If you've been paying into your investment for at least two years, it may have a 'surrender value'. This is the amount the investment company will pay if you end the policy.

You may also be able to sell your investment privately (usually through a broker or independent financial adviser). This often means you get a higher price, but is usually only possible if you have been paying into your investment for a number of years.

Selling your investment can help to reduce your monthly payments in the short term, but means you will no longer have any means of paying off everything you originally borrowed. Your lender therefore won't let you do this unless you can show that you have made other arrangements, such as:

  • buying a new investment, or
  • switching to a repayment mortgage (see below).

Switching to a repayment mortgage

If you can't reduce your interest or investment payments, you could consider switching to a repayment mortgage. It is sometimes possible to stop your investment payments temporarily while you arrange this.

Switching to a repayment mortgage won't necessarily reduce your total monthly payments (for interest and your investment). However, repayment mortgages are also less risky because they are guaranteed to pay off everything you owe.

They are also more flexible, and it's usually easier to extend the mortgage term. This gives you longer to pay off your mortgage and can make your mortgage more manageable in the long run.

If you switch to a repayment mortgage and have a partner or dependents, it's a good idea to take out separate life insurance. This may be needed to pay off your mortgage, protecting your family from long term debts if you die.

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The important points

  • You might find it useful to get advice and help negotiating with your lender, as this can be complicated.
  • Your lender may accept reduced interest payments for a short period under certain circumstances, for example your investment policy is due to pay off your mortgage soon.
  • You might be able to reduce your investment payments if your problems are temporary or switch to another investment which costs less.
  • Switching to a repayment mortgage could be an option as then it might be easier to extend the mortgage term and so reduce your payments.

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