Switching to Interest-Only mortgage

Harry_Potless

If someone is having difficulties in repaying his/her mortgage, due to a change of financial circumstances, are banks generally amenable to helping out by offering a different mortgage?

I've heard that some people have switched from a repayment mortgage to an "Interest Only" mortgage at a substantial lowering of the repayments (of course, it means that the loan value is not paid off and might result in the forced sale of the property, at the end of the mortgage period, in order to repay the actual loan - but that is surely better than the risk of a repossession anyway, due to an inability to meet the repayments).

Thanks for reading and hopefully sharing a little of your wisdom in this.:)

Jimbo1976

Historically lenders were quite happy to switch borrowers from repayment mortgages to interest only, but those days are long gone now.

Now they are extremely resistant to move anyone to interest only. There is a lot of debate as to how many borrowers are going to repay their interest only loans when they mature.

You may have some chance of persuading your lender to move you to interest only for a short period if remaining on a repayment mortgage would push you to a situation where you can't pay your mortgage. However your payments will rise back above where they are at the moment to compensate for the lack of capital repaid in the period.

If you do want to switch, it is best to write to them explaining why you need to do this and how long you want to do this for. They will not allow you to switch on a permanent basis unless you can show them you have an alternate way of paying off your mortgage at the end of the term.

If they refuse to switch you to interest only then you have the option of complaining to the lender and if the lender refuses to budge you can take it to the Financial Ombudsman Service (FoS). FoS would only act if it feels your lender has treated you unfairly.

Another idea may be to increase your term, as this will reduce your monthly payments. However if this takes you beyond your retirement date, your lender may ask how you are going to pay the mortgage. Also by extending the term you will pay interest for longer.

Harry_Potless

Thanks for the reply.

Jimbo1976 wrote: »

Historically lenders were quite happy to switch borrowers from repayment mortgages to interest only, but those days are long gone now.

Now they are extremely resistant to move anyone to interest only.

Is that as a result of the current financial crisis that started around 2008, or were lenders reluctant to allow switching before then?

I could've sworn I heard, quite recently, that people who have lost their jobs due, in the main, to the economic downturn were switching to lower Interest-Only payment plans and even that some were receiving help from Welfare Departments towards meeting these, lower, payments.

Thanks again.

Thrugelmir

To consider your request they may require a detailed budget from you. Also have you spoken to any lenders that you have unsecured credit balances with. As lenders may welll expect you to renegotiate with them as well.

holly_hobby

Under the MCOB, the lender must treat customers fairly and partake in positive mediation, with any mortgagor in financial difficulty/arrears. (indeed evidence of such actions are a requirement under any petition for a possession order)

The options and actions to be considered by them, will obviously depend upon whether your financial difficulties, are short or long term.

They may consider/offer an extended term, temporary change of repayment method to interest only, or to roll up arrears (ordinarilly this occurs where the property is already actively or to be put for sale).

If the issues are longterm, with no foreseeable remedy, then obviously the Firm will look for you to redeem the mortgage by disposal of the property, as the only really viable solution in the matter.

In situations of payment difficulties, you need to speak to your lender always as a priority, advise them what the issues are (or forseen), why you feel they will be shortterm (if so), and your plans for recouping any arrears or lost debt reduction (if switched from C&I to I/O) - as this will clearly demonstrate to your lender that you have not taken the issue lightly or without forethought and a plan of action, before approaching them for their assistance. (and it will be brownie points in your favour, in respect of their arrears operations).

Take the bull by the horns, and contact them before any arrears start .... it always makes for a better arrears management relationship if you start from a clean footing.

Hope this helps and good luck .. (hope your financial issues are soon back on track !)

Holly x

Harry_Potless

holly_hobby wrote: »

If the issues are longterm, with no foreseeable remedy, then obviously the Firm will look for you to redeem the mortgage by disposal of the property, as the only really viable solution in the matter.

Thank you, Holly (the name of my house, would you believe?).

I was under the impression that an I/O mortgage could be taken out for the whole duration of the loan, so long as the repayment of the capital sum lent could be paid at the end of the mortgage term.

What if (as in this case) the value of the property is already almost two-and-a-half times that of the outstanding mortgage and there are still circa 17 years to go (with the property being located in a pretty much ever rising property price location) - meaning that, barring the arrival of the four horsemen of the apocalypse (at which time it wouldn't matter), the value of the property is as good as guaranteed to be many times that of the loan, at the mortgage's contract end?

It would seem crazy to have to sell it and move into rented accommodation - given that such would be far greater (at least twice or thrice) than would an I/O mortgage switch.

To me, it's a "no-brainer" (which is probably why I'm not a banker).

PS. What does MCOB mean - excuse my ignorance, I'm usually pretty good at guessing these.

holly_hobby

Hello Harry ...

Good taste on the house name ....

Ok, there appears to be from what you say, adequate security for the lender re a permanent interest only swap ...... and certainly if the LTV is below 75%, more likely to accept this as a longterm management of the situation (if your financial situation is unlikely to return to your former income).

However, you must appreciate that the lender does not have to permit this regardless of the LTV, although they will as I say look to obtain a positive outcome for all (subject to circs), albeit their interests will obviously take primary position.

One thing that you need to consider, is it appears you plan to redeem the os mge when the term ends by selling the property, you need to be honest and ask yourself if selling then, will be any easier (emotionally) that selling in the shortterm ? (even if the lender permits this as your planned method of repayment, and notwithstanding any negative movements in the market affecting the market value of your property).

I don't mean to be a wet blanket, just want you to consider what the implications of going on IO for the remaining duration of your mge, really means.

Hope this helps ..... but you must SPEAK TO YOUR LENDER asap on this .....

Holly x

PS - nearly forgot .... MCOB is the Mortgage Conduct of Business Book (in essence a FSA handbook for the mortgage industry (pre regulation they voluntarily adhered to the Mortgage Code, which MCOB replaced in Oct 2004 ... sorry for the jargon without explanation, which normally I do include :doh:)

Harry_Potless

holly_hobby wrote: »

Hello Harry ...

Good taste on the house name ....

...............................................................................................

One thing that you need to consider, is it appears you plan to redeem the os mge when the term ends by selling the property, you need to be honest and ask yourself if selling then, will be any easier (emotionally) that selling in the shortterm ? (even if the lender permits this as your planned method of repayment, and notwithstanding any negative movements in the market affecting the market value of your property).

I don't mean to be a wet blanket, just want you to consider what the implications of going on IO for the remaining duration of your mge, really means.

Hope this helps ..... but you must SPEAK TO YOUR LENDER asap on this .....

Holly x

PS - nearly forgot .... MCOB is the Mortgage Conduct of Business Book (in essence a FSA handbook for the mortgage industry (pre regulation they voluntarily adhered to the Mortgage Code, which MCOB replaced in Oct 2004 ... sorry for the jargon without explanation, which normally I do include :doh:)

I even planted a holly tree on either side of the gate in order to give the name some credence.

I don't view your advice as being wet-blankety at all. I asked for advice and appreciate honest opinions far more than the sugar-coated variety so, :beer: for that.

On the contrary, selling the house would be anathema (but a possibility, I acknowledge). I was just pointing out the huge "safety-net" afforded by the current and projected value of the property to myself and the lender, alike.

I spoke with the lender (by telephone and in writing), explained my situation and asked what alternative mortgage options they might be able to offer me. Their only reply to my request for help was a letter advising me of the "Closing Figure" for the loan, which was why my interest was raised when I heard of I/O mortgages (I didn't even know they existed until I heard them mentioned on a radio programme).

By the way, I would NEVER have figured out "MCOB" :rotfl:

Harry.

PS. Can we mere mortals obtain a copy of the MCOB?

Thrugelmir

Harry_Potless wrote: »

What if (as in this case) the value of the property is already almost two-and-a-half times that of the outstanding mortgage and there are still circa 17 years to go (with the property being located in a pretty much ever rising property price location) - meaning that, barring the arrival of the four horsemen of the apocalypse (at which time it wouldn't matter), the value of the property is as good as guaranteed to be many times that of the loan, at the mortgage's contract end?

A lender doesn't want the problem of repossessing your house. To much cost and hassle. That's not priced into lending rate.

In essence. If you can't afford to buy it, them sell it.

Harry_Potless

Thrugelmir wrote: »

A lender doesn't want the problem of repossessing your house. To much cost and hassle. That's not priced into lending rate.

And I can understand why. It must be simply awful for the poor dears when they are obliged to leave off of updating their FaceBook profile for five minutes and actually do a stroke of work for their meager remuneration.

In essence. If you can't afford to buy it, them sell it.

Can I relay that to the kids as being the reason they have to give up their bedrooms as the family home they have been brought up in is being disposed of, rather than their dad actually trying to seek a way to prevent that?

So nice to see the milk of warmth and kindness which emanates from some of the Internet faceless.

Your "advice" is appreciated. :T

holly_hobby

Well thats poop from them.

You need to actually advise that there are going to be payment issues, state the (estimated) free equity, and what arrangements (short or long term) may be facilitated by them. I would possibly even make an appointmet, and pop into your local branch and get te process started.

NOW, as I said earlier, it may well be that they won't accept IO long term, and as I say if your payment issues will be for the duration of the mge term, they may well be of the opinion to cut you loose in the short term, by requesting redemption of the mge (albeit they will give you circa 3-6 mths to hopefully achieve this). This would be permitted under the MCOB guidelines, as (if as I guess there will be no future remedy to your reduced finances), this would be the only responsible and viable solution ppen to the lender, due to the longterm issues at hand.

If NWs response was as you say, to simply send a closing redemption statement - without any explanation or reference to what their requirements are, does suggest to me that somethings been lost in translation !

Now, you could of course seek a remortgage to an alternative provider, on an IO basis - but this is typically 75% LTV or less, max term will be dictated by the max redemption age ceiling, income would need to be sufficient to service, and they may not be acceptable to your planned method of repayment i.e to sell the property. If you wanted to explore this option, a good whole of market broker will be able to assist (there will normally be a fee for their service).

Age 55+ - possible option of a lifetime equity release mge (but they bring their own issues too !).

FSA MCOB is freely available, but may be sleep inducing for those not involved in the industry !! But heres a link you requested .... http://fsahandbook.info/FSA/html/handbook/MCOB/

Hope this helps

Holly