Interest only mortgage - can lender force change?

Soubrette

I have a friend who has an interest only mortgage which will run for another 22 years. She has come to terms with the fact that barring a lottery win, she will be selling the house to pay off the loan when she is 70. Her plans on retirement all revolve around this fact.

I am concerned though that the lender may try and change her to a repayment mortgage at some point in the future. She is talking about moving but her mortgage is fully portable and she says the mortgage is absolutely guaranteed to remain on the same terms and conditions until she is 70. Her current deal ends in 4 years.

Should she be making alternative plans, just in case, or is she right - once she has this type of mortgage it can never be changed by the lender?

Thanks

Wh05apk

She should be able to stay on interest only provided she stays where she is, if she moves house and ports the mortgage, she will need to meet the lenders criteria at the time, which almost certainly will not allow interest only, without a solid repayment vehicle.

Thrugelmir

Soubrette wrote: »

She is talking about moving but her mortgage is fully portable and she says the mortgage is absolutely guaranteed to remain on the same terms and conditions until she is 70.

There's no absolute guarantee. Lender can impose a change of terms when the port is applied for. Any port will need to meet the lenders current criteria at the time of the application.

holly_hobby

Porting relates solely to the mortgage product (fixed, discount, etc), and not the underlying mortgage balance (or repayment method).

Any new mortgage (following a house move), will be assessed as a new application, and as per the lenders applicable criteria at the time the mge (and application to port the existing deal), is applied for.

Given that a majority of the major lenders have pulled IO lending from their mandate, and the currently remaining typically want a minimum of 25% deposit AND evidence of an acceptable separate appropriate repayment vehicle - I feel that she's between a rock and a hard place.

If she stays where she is with the plan to just sell at the end of the mge term, the lender (under FSA IO regs) has to check at least once duing the lifetime of the IO mge that the mortgagor has a suitable repayment vehicle/plan in place (of which the forced sale of property to redeem isn't usually acceptable).

So, as your friend currently has no vehicle in place, its debateable whether she will actually be able to remain there until the current scheduled repayment date (depending at which point the lender makes their IO verification check), following which how its managed will be down to lender and mediation following their discovery.

What I would recommend (and at risk of stating the obvious !), is for her to consider selling, and down scale to a smaller property, and to a mge amount that she can comfortably manage on a repayment basis over an affordable/available term - or of course go into rented (when/if renting a comparible/comfortable home) is cheaper than her IO mge payments (which in the absence of an independent repayment vehicle, could be construed as paying rent just under a diffient guise) .

Hope this helps (even if just food for thought)

H x

magpiecottage

I do not think that a lender could force a move away from interest-only provided a borrower continued to comply with the terms of their original contract - i.e. the original term had not expired, they continued to live in the same home and they met all interest payments on time.

Any move away from that - even to a new fixed rate, for example, or failing to insure the property and all bets could be off.

However, the fact that the lender could not enforce a change does not mean that a borrower would be wise to do nothing about the impending problem, so I think Holly's advice makes sense.

Thrugelmir

magpiecottage wrote: »

I do not think that a lender could force a move away from interest-only provided a borrower continued to comply with the terms of their original contract - i.e. the original term had not expired, they continued to live in the same home and they met all interest payments on time.

To comply with current FSA guidance. Lenders will write to remind borrowers that the debt will need to be repaid at the end of the contractual term. So the problem has to be addressed at some point of time.

They will also remind her that the mortgage term ends after her normal retirement age.

noddynoo

Where will she live if it doesn't sell

Soubrette

Thanks for the advice guys.

So assuming she decides to stay put - she is on a fixed rate mortgage which ends in about four years - what is likely to happen then? She currently has about 20% equity and a gross salary to mortgage of approx x7, there is no partner, so it's unlikely she'll be able to get another deal at the end of the four years.

Does she get to stay on the Interest Only but get moved to their standard rate? Or will she have to remortgage and face losing her interest only mortgage?

Basically is there some catchall term that lenders tend to put in their agreements saying they can change the terms and conditions at their discretion or is she (as she believes) 100% guaranteed the same mortgage until 70, it's just the mortgage rate that is renegotiated.

I am of course assuming interest rates remain low and other factors apart from the type of mortgage don't over take her.

Thrugelmir

Your friend will default onto either the lenders SVR or the rate as determined by the current product terms.

The lender could decline the transfer to another product at a lower rate of interest. If the type was to remain interest only.

Remortgaging options to a new lender could be limited if there's no repayment vehicle in place.

holly_hobby

Yep under TCF, I'm not sure how lenders will manage the FSA mandate - but I have already heard of a couple whom have "requested" the mortgagors to switch repayment method..

I am also aware if you a with Halifax, and if you request a product change/switch and are on an IO mge - you currently have to complete a Declaration Of Intent - essentially providing details of repayment vehicle/s in place (of which the form identified acceptable methods).

The declaration also states that Halifax reserve the right to periodically ask for sight/proof of the cited vehicle, and if it doesn't exist or isn't sufficient - that they may "ask" the mortgagor to change part or all of the mge onto a C&I basis.

Now, if you have told a porkie, and they ask for proof/sight of the vehicle and you can't provide it - whether they could then cite breach of T&Cs (under non maintainance of a RV you have claimed to have within the DOI) remains to be seen ..... but I bet they'll give it a go.

Holly

Add on ...

When her fixed rate ends, she will simply go onto their SVR/BMR rate or variable rate as noted within her mge T&Cs.

If she asks for a product switch onto an existing borrower rate, then depending upon the lender, and mindful of Halifax's approach, she may have to sign a lie to stay to remain on IO/not be forced onto C&I.

If she remortgages, as I say, those still in the IO market, want evidence of a separate repayment vehicle (and unless the LTV is very low), sale of the property itself won't be accepted.

Holly x

Thrugelmir

holly_hobby wrote: »

Yep under TCF, I'm not sure how lenders will manage the FSA mandate - but I have already heard of a couple whom have "requested" the mortgagors to switch repayment method..

Lenders are protecting themselves in the first instance. As can categorically say that the borrower was kept informed. Thereby eliminating any dispute at a later date.