Switch to Repayment OR make regular Over-Payments?

Repromancer

Hi guys

Yesterday’s news concerning the “interest-only” time bomb has probably scared a lot of people.

I wanted to get peoples opinion on my situation, as I have yet to convince myself to jump on the repayment mortgage with my current lender.

I’m 29, earn £35k. 6 years ago, I took out an interest-only mortgage. £146k loan, 85% LTV, 25 years. Fixed 2 years, currently on Bank’s SVR.

For the first 5 years, I did not pay off a single penny towards the capital.

My interest element of the mortgage is currently £320. For the past 1 year, I have instructed my bank to take out a fixed payment of £750 from me (interest and capital). So effectively I have been paying of £430 capital a month on average.

However for the past 2 years I have received a generic letter from my Bank saying that I am on interest-only, and periodically they may ask for a “repayment vehicle”.

I obviously do not have a “vehicle” in place, as they do not see a Cash-Isa as a “repayment vehicle”.

When I spoke to my bank 2 weeks ago, they said I can go on repayment, and stay on the same terms (i.e. same SVR). I can even extend the term up to 40 years, but I don’t want to pay more interest, as I have only 19 years left.

I am happy to go on repayment mortgage now, as that will make my mortgage £800 a month, which is only £50 more than I’m paying right now. And avoid the headache of finding a “repayment vehicle”.

However I am worried about future BOE interest rate rises, my mortgage can potentially go up to £1000.

In April 2014 new regulations will come in place. Will banks force their existing customers to go on repayment? Will they force customers on to new terms, with potentially higher rates?

Do I go on repayment now, or carry on making the current payments and keep my “niche” product and have control of my outgoings.

Thanks for your responses and advises.

R_P_W

If you are on their SVR then they don't need to wait for BOE rate to change, they can increase or decease as they like.

Why don't you look at what repayment options might be available with other lenders?

Repromancer

R_P_W wrote: »

If you are on their SVR then they don't need to wait for BOE rate to change, they can increase or decease as they like.

Why don't you look at what repayment options might be available with other lenders?

My mortgage terms says after the 2 year fixed period it will track the BOE + 2.19%. And it has been for the past 4 years.

The only example of a bank increasing their SVR so far is Bank of Ireland, and I suspect there will be a lot of complaints there.

The reason why I don't look to go to other lenders, is because I'm currently paying 2.69%, and only have 15% equity. There is no way I will be able to get a deal like that in the current market.

VT82

I'd stick with what you're on. Only change if it's to get a materially better deal on your interest rate, or if you are forced to, not just to avoid being sent the odd letter.

Many people are recommended to be switched to repayment, as it seems like they can't be trusted to overpay sufficiently. You obviously can, as you have the track record of overpayments, and will undoubtedly have sufficient salary increases to increase your overpayments to a level that would in fact clear the balance at the end of the term.

Keep the flexibility. Down the line you might need to borrow more for something else, at a higher rate than your mortgage. Much better to have the flexibility to overpay that borrowing instead paying down the capital on your mortgage temporarily. That would save you money. The proposal to switch to repayment now saves you none.

John424

I was in a similar boat, I had no repayment vehicle and was on interest only and paying down the capital as and when I had a few quid e..g bonus time with an eye on the amortisation schedule so I was always on or ahead of the curve that a repayment mortgage was on.

I switched as Halifax did not approve of my method and were writing to me about me and not giving me any deals so I switched. To be honest, its better as you always know you're on track, yes interest rates will go up but that is some way off which gives you a few more years to pay down the capital and I suspect if interest rates go through the roof one day anyway then we'd all feel it be it on interest only or repayment.

OffGridLiving

Repromancer wrote: »

I can even extend the term up to 40 years, but I don’t want to pay more interest, as I have only 19 years left.

You only have 19 years left of your mortgage deal, not 19 years left of your mortgage because you didn't repay anything from the balance for 5 years.

If you keep the 19 year term then your monthly figures will be much higher because you're not only paying down the capital to cover the 19 years but also for the 5 you missed. This is why your lender is offering you the option to extend the length of the mortgage. It would reduce your monthly outgoings.

Unless you are in negative equity or your LTV is very poor, then I don't understand why you are sticking on SVR, especially when you are afraid of rate rises? You could get a 5 or 10 year fix, a discounted rate or a tracker cheaper than your SVR rate.

If I were you I'd remortgage to a 25 year term onto a cheaper deal and make overpayments as and when you can to try and reduce the term to 19 years or less. It's a much more flexible way to manage your finances than to reduce the term and pay a larger repayment each month that cannot be changed if you need some extra cash.

dimbo61

Having a quick look on " whatsthecost" I put in £146K over 19 years at 2.69% and it came up with £818.57.
Now I would up your payment to £819 now and when the bank next write you could point out that you are overpaying every month so you now HAVE a 19 year repayment mortgage.
Review the amount each time interest rates increase.

Thrugelmir

Repromancer wrote: »

The only example of a bank increasing their SVR so far is Bank of Ireland, and I suspect there will be a lot of complaints there.

Other lenders to "break" their guarantees have been Skipton BS and Norwich & Peterborough BS.

In addition around 10,000 mortgages were sold by BOI to the Mortgage Works (a sub of Nationwide). All these borrowers suffered a change of terms, i.e. increase in their interest rates.

Personally I would opt for a monthly outgoing that you are comfortable with and switch to a repayment mortgage. As the discipline of paying every month is invaluable way of budgeting. No chance that money will be frittered away on something else.

Return on instant access cash ISA's is now so low. That debt repayment is the best option for excess cash.

Repromancer

VT82 wrote: »

I'd stick with what you're on. Only change if it's to get a materially better deal on your interest rate, or if you are forced to, not just to avoid being sent the odd letter.

Many people are recommended to be switched to repayment, as it seems like they can't be trusted to overpay sufficiently. You obviously can, as you have the track record of overpayments, and will undoubtedly have sufficient salary increases to increase your overpayments to a level that would in fact clear the balance at the end of the term.

Keep the flexibility. Down the line you might need to borrow more for something else, at a higher rate than your mortgage. Much better to have the flexibility to overpay that borrowing instead paying down the capital on your mortgage temporarily. That would save you money. The proposal to switch to repayment now saves you none.

This is a brilliant response. Thank you!

Repromancer

OffGridLiving wrote: »

You only have 19 years left of your mortgage deal, not 19 years left of your mortgage because you didn't repay anything from the balance for 5 years.

If you keep the 19 year term then your monthly figures will be much higher because you're not only paying down the capital to cover the 19 years but also for the 5 you missed. This is why your lender is offering you the option to extend the length of the mortgage. It would reduce your monthly outgoings.

Unless you are in negative equity or your LTV is very poor, then I don't understand why you are sticking on SVR, especially when you are afraid of rate rises? You could get a 5 or 10 year fix, a discounted rate or a tracker cheaper than your SVR rate.

If I were you I'd remortgage to a 25 year term onto a cheaper deal and make overpayments as and when you can to try and reduce the term to 19 years or less. It's a much more flexible way to manage your finances than to reduce the term and pay a larger repayment each month that cannot be changed if you need some extra cash.

I have considered fixing and going on repayment last year. But I have checked on comparisons websites, and I can't seem to find a better rate than the 2.69% I have on 85% LTV. Unless I am not checking the right places..

Repromancer

Thrugelmir wrote: »

Other lenders to "break" their guarantees have been Skipton BS and Norwich & Peterborough BS.

In addition around 10,000 mortgages were sold by BOI to the Mortgage Works (a sub of Nationwide). All these borrowers suffered a change of terms, i.e. increase in their interest rates.

Personally I would opt for a monthly outgoing that you are comfortable with and switch to a repayment mortgage. As the discipline of paying every month is invaluable way of budgeting. No chance that money will be frittered away on something else.

Return on instant access cash ISA's is now so low. That debt repayment is the best option for excess cash.

Ok that is really worrying that the banks can increase the rate on their SVR. I think it is in BOI's small print, and they can change the SVR under “exceptional circumstances”. If the courts agree, this will set a precedent on all banks…