Options for 73 year old, interest only mortgage

dietlard

Hi Guys, looking for some options. Mother is 73. Finished paying off mortgage 10 to 15 years ago. Building Society left £1 outstanding so they could keep mortgage deeds and advanced a further £27,500. Current equity in property is 200k - 300k. Is currently paying back interest only, at approx £130 / month. They will take back their capital on sale of property. Building Society won't allow her to change her deal, think it is fixed at approx 6%. Is in perfect health and concerned that she will be paying this rate for a very long time. Is this fair ? Is it legal ? Is there anything she can do to get a better deal (ideally she would like to reduce capital also - even very slowly is ok). There are 3 employed children any or all of whom could possibly be added to mortgage. House will eventually be left to them anyway.

Pssst

Not addressing the actual question but i wonder if you could explain how Mother arranged this ? i.e getting an interest only mortgage with the understanding that captial would be returned on death?

Does this allow her to move house if she wanted to or is she tied to the house she is in?

ta

Mrs_Bumble

Is this actually with the building society?

Sounds much more like an equity release scheme?

http://www.moneymadeclear.fsa.gov.uk/pdfs/equity_release.pdf

Have you seen the paperwork?

Who arranged the advance for your mother?

jamesd

There's nothing unfair or illegal about people who are aged 58-63 taking out a mortgage. Your mother seems to have a better deal than offered by an equity release mortgage and presumably wanted the money for something and used it well. Moving on, the capital owed isn't huge and the children might consider whether they can collectively offer her a loan from their funds at a lower rate, perhaps matching the rate you can get after tax on savings accounts. If her monthly payments remain the same that would gradually clear the debt owed to the children.

About half of the population in normal health at her age will live beyond age 88, so 15 years is a reasonable target for trying to clear the debt before death if she wanted to try that, unnecessary though it is.

Assuming the children could get 4% before tax on savings on average over the years, that's 3.2% after tax, leaving that 3.2% as the rate to your mother. Interest payments at that 3.2% rate would start at £73.33 a month and with payments of £150 a month the loan would be cleared in 21 years. If there's a desire for her to pay less each month, at £140.89 a month it would be cleared in 23 years; at £129.95 a month in 26 years; at £118.93 in 30 years; at £108.93 in 35 years; at £100.42 in 41 years. It's unlikely that she would live for 26 or more years so those terms are just to give an indication that the debt is reducing gradually.

At 3% before tax on savings, that's 2.4% after tax. Interest would start at £55 a month and with payments of £150 a month the loan would be cleared in 19 years.

If the children offered the money interest free it would take 15 years to clear the loan at £150 a month.

It's also worth a chat with a mortgage broker since she may be able to obtain a better interest rate on a remortgage. She probably couldn't get a 30 year term but that's what it would take to pay back 27500 plus 500 costs at 5%.

If she could obtain a repayment mortgage at 5% for 15000 of which 500 is spent in costs she could pay £119 a month and clear that in 15 years. The monthly £31 difference between that and £150 would be enough to clear a £13,000 interest free loan from the children in 35 years or enough to not clear it at all and pay them 2.86% interest.

She could clear the current mortgage in 15 years by paying £232.06 a month so another option would be the children lending her £82 a month between them, interest free. That would leave her owing the children the £27,500 at the end of the 15 years. Or if she's able to afford it without trouble, she could simply pay the £232.06 a month herself instead of £150.

If the children can afford the capital cost the 4% interest equivalent and clearing the loan over 21 years looks like a reasonably fair deal to all parties. The children don't lose out greatly on interest and your mother saves money compared to keeping the mortgage. She'd pay the children £10,302 in interest and have the loan paid off compared to paying £34,650 in interest at 6% on the mortgage and not clearing any of that.

dietlard

Pssst wrote: »

Not addressing the actual question but i wonder if you could explain how Mother arranged this ? i.e getting an interest only mortgage with the understanding that captial would be returned on death?

Does this allow her to move house if she wanted to or is she tied to the house she is in?

ta

Yes it does allow her to move, this is with Nationwide, she has 4 years left on a fixed rate deal at 5.63%, or she can pay off the advance, or she can pay off some of the advance to reduce the payments. With regards to how, the original mortgage was paid off and Nationwide made a further advance of 27,500, leaving £1 outstanding on the original mortgage so they could keep the deeds so they can get their money back whenever property is sold.

dietlard

Mrs_Bumble wrote: »

Is this actually with the building society?

Sounds much more like an equity release scheme?

Have you seen the paperwork?

Who arranged the advance for your mother?

Yes, this was advanced by the original lender - Nationwide. And no, it is not an equity release scheme. Apparently, she is in a fixed rate deal until 2012. No, not seen paperwork.

Mrs_Bumble

If I was you I would get a letter of authority from your mother to give permission for Nationwide to speak to you in relation to the mortgage and then contact them to see what exactly the deal is and get a copy of the original mortgage offer. Just so you know exactly what you are dealing with.

opinions4u

dietlard wrote: »

Building Society won't allow her to change her deal, think it is fixed at approx 6%.

Is in perfect health and concerned that she will be paying this rate for a very long time. Is this fair ? Is it legal ?

She signed for that deal. Perfectly fair and legal. Would you be asking the question if interest rates were currently 10%?

Is there anything she can do to get a better deal

Remortgage to another lender, but there will probably be an early repayment charge to pay.

Take a look at www.moneyfacts.co.uk to get an idea of options available rate rise. Most 5 year fixed rates are currently above 5.5% anyway though.

(ideally she would like to reduce capital also - even very slowly is ok).

Does her current deal allow her to overpay? If yes, overpay within any limits. If not, build up a savings pot and pay a lump sum off in 2012. She should be able to earn 5% in a regular saver account from Halifax, RBS, Lloyds etc.

Here's a calculator for overpayments. £100 a month over and above the interest only payment would (pure guess) repay the whole debt in around 15-20 years.

There are 3 employed children any or all of whom could possibly be added to mortgage. House will eventually be left to them anyway.

Get advice before doing this, in relation to the implications of paying for old age care.

Yes, this was advanced by the original lender - Nationwide. And no, it is not an equity release scheme. Apparently, she is in a fixed rate deal until 2012. No, not seen paperwork.

Don't underestimate the potential value of Nationwides BofE+2% tracking within their standard rate for longer standing borrowers. If the rate environment remains low (as has happened in Japan) this could be very handy at the end of the fixed rate arrangement. I don't have an interest rate crystal ball though!