Take 5: Interest-only mortgages

Many interest-only mortgage holders are facing a shortfall. This week we look at how to help clients in this situation.

1. Review the product. Make sure the client understands their situation, what they have now and how much they will need in the future to repay the loan.

2. Find out your client’s future plans. Establish what their specific plans for the future are. If they plan to downsize and use the proceeds to pay off the capital, then they face less of a problem than someone who plans to stay in their home.

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3. Consider switching to a repayment mortgage. While not always an option, it may be the most manageable way to repay the debt over time. Overpaying – within the terms of the mortgage – is also advisable where possible.

4. Remember investments to make up the shortfall should be proactively managed. If a plan to contribute to an investment over the remaining mortgage term is put in place, the investment should be proactively managed to ensure performance targets have the best chance of being met considering a client’s risk profile.

5. Make sure there is a solid repayment vehicle in place. If a new client is adamant they want to take out an interest-only mortgage, ensure they understand the need for a large lump sum once the term is over.

More from Money Management’s Take 5 series:

Investing in emerging markets

Carrying out platform due diligence

Accessing European funds