In the main, it is only buy to let mortgages that are taken out on an interest only basis these days. The reason for this is that some Landlords like to maximise their monthly profits.
Back in the 1980’s & 90’s however, residential interest only mortgages were very popular. The concept was that you would pay interest on the capital owed then pay the lump sum back at the end of the term.
When borrowers took out an Interest Only mortgage, they were normally advised to set up an investment vehicle at the same time. This was typically a Low-Cost Endowment policy.
The policy provided life cover to pay the mortgage off should a borrower died. If the investment performed well then, the idea was it would pay off the mortgage, possibly even with a surplus at the end.
Many borrowers simply weren’t made away of the risks with this type of mortgage. There was no guarantee that the investment would mature for a big enough sum to repay the mortgage.
This led to a surge of complaints and thousands of people received compensation if they were mis-sold to.
It’s quite a long time now since Endowment mortgages were popular. Some people still have them though and perhaps they did not get around to switching it to a repayment mortgage.
If you end up in this position it can be a very worrying time because you might be worried about losing your home. Interest only mortgages are still available but since Lenders are much stricter about who can take them out it’s probably less likely that there will be these kind of issues in the future.
Whilst it is possible that a borrower could be taken by surprise by their Lender requesting full repayment of the balance, for that to happen they would have had to not received lots of correspondence from their Lender.
Lenders write to their interest only customers on a regular basis to ensure they know they must make plans to repay the capital.
If you have no means to repay the capital our advice is to keep the lines of communication fully open with the Lender. They will be very experienced in dealing with these situations, you just need to let them know where you stand. They do not like taking properties into possession, although they will do this as a last resort.