MSE News: Interest-only borrowers could be mortgage 'prisoners'

JimmyTheWig

Blondeblitz wrote: »

When my mortgage term ran out I was unable to get another mortgage from any of the very few shared ownership mortgage lenders. The reason given by all was the loan to rate value due to the drop in property prices. My overall property price according to the Nationwide had dropped by £12,000. So my half had dropped from £65,000 to £59,000. I could not understand why they did not look beyond that.

Because it's a mortgage. The most basic fact about a mortgage is that it is secured against the value of the property.
If, rather than buying your share of your home you had decided to go travelling the world on a holiday of a lifetime, do you think the bank would have lent you £58,000? No they wouldn't.
The only reason they lent you that money was because you had something worth £65,000 that they could take from you if you stopped paying them.
Now you only have something worth £59,000 which, after auction fees, etc, is unlikely to cover your loan if they need to take it off you.

So I am currently on a standard variable mortgage and paying 2.5%, which means my payments have dropped by £200 a month and the Nationwide would rather that money went into my coffers and not theirs. How can I get my head around that!

It's the deal you signed up to. If they knew this is what would happen to base rates, they wouldn't have offered you it!

Anyway I have been paying the £200 a month into an Abbey Cash ISA and getting 3.5% interest, I have saved just over £4000 by doing this. Am I right in doing this or should I be paying it off the mortgage?

In terms of the maths, you are earning (3.5% net) more than you are paying (2.5%) so keeping it in savings is best.
In reality you need to assess your situation and attitudes. In savings it means it is there for you if you need it rather than taking out a loan at a much higher rate. But it also means it is there for you if you just fancy spending some of it. If you think the temptation will be too great (I don't think it will from what you've written) then it may be better off in the mortgage where you can't touch it.

quote]Also I am now being made redundant and getting a small sum and could afford another £5000 towards the mortgage on top of my savings. Again should I pay it off or should put all the money in a high interest savings account?[/QUOTE]
This is above the limit that you can pay into a cash ISA in a year, so you'll be taxed on interest you earn. If this means that the net rate (i.e. after tax) is less than the 2.5% you are paying on your mortgage then the maths says paying off the mortgage would be better.
However, the same personal reasons apply. If you are being made redundant do you need this money to live on while you find a new job, etc?


The time to put this money towards the mortgage will be when you want to remortgage. By reducing the amount you owe you might be able to get down to a reasonable loan to value percentage, which means they might offer you a deal.