Help - moving home with interest only mortgage

jasehel

Hi,

I could really do with some advice please.

I am in the process of buying a new house. I currently have 2 mortgages on my current house - part is interest-only and part is capital repayment.

I have agreed the sale of my house for around £200k. We'll be putting all the money back into the new property, and only £45k of that will be the interest-only mortgage.

Based on my income, the bank initially told me they would lend me an amount that easily covered the cost of the new house I want to buy. However, when going back to begin to finalise the offer, they have now said that because part of the borrowing carried forward is interest-only, then they will only allow me to borrow up to 75% LTV. This has caused me some problems as it leaves me having to find around £10k myself from elsewhere. We are being told that the amount we are allowed to borrow is actually over £100k less than we were told 6 weeks ago!

The advisor that we've dealt with so far at the bank seemed very unknowledgeable on the whole matter, and we're due to go back to see someone else in a few days.

Has anyone else ever heard of this? I've looked online and found that banks will only lend up to 75% LTV on brand new interest only mortgages, but that seems to be the case when all the mortgage is interest-only. It seems unfair that because only a small part of my borrowing (less than a fifth) will be interest-only that I'd be penalised for the whole mortgage.

Many thanks in advance.

James.

opinions4u

Just put the £45k on to a repayment basis then.

jasehel

Hiya, thanks for your reply.

I'm afraid I can't afford to, I only have 11 years left on our interest-only, and currently pay around £78/ month on a tracker for that part of the mortgage. To transfer that to repayment over the same term would increase repayments to almost £500/,month. In fact, it'll cost as much as the extra borrowing I'll be taking out for the house move.

But does anyone know if the limits on entire borrowing because we have a proportion of a mortgage is standard, or if the bank guy even got it right? The guy at the bank really didn't seem to know his stuff and was quite flippant about what is essentially my family's finances.

Thanks,

James.

kingstreet

We can't really comment on one particular lender's attitude to interest-only (I assume with no repayment vehicle?) without actually knowing which lender you are talking about.

Are you arranging a new mortgage with your existing lender? Are you porting the two rates which apply to the sub accounts on your current mortgage to the new one?

Do you actually have a repayment plan for the interest-only element of your mortgage? If not, why not take the mortgage over a longer term to reduce the overall monthly mortgage cost, ensuring it is all repaid over time?

jasehel

Hi Kingstreet,

We have plans in-place to. Pay off our mortgage. We have an endowment which has a projected shortfall, so will be transferring the shortfall amount to capital repayment as part of this mortgage. That leaves £45k on interest only, which will (hopefully) be covered by our endowment maturity. I would prefer to carry on with the endowment, as it will be paid off this way in 11 years time rather than 25 years.

But can anyone comment on the LTV thing? It seems crazy to me that such a small proportion of our mortgage dictates what we can borrow.

HSBC will normally lend up to 90% LTV. Purely as an example even if just £10k of our mortgage was being carried over as interest only, then we'd only be allowed to borrow up to 75% LTV in total, regardless of our income.

That means that until our interest only is paid off we can't buy a house as big as we'd like, even though we'd not actually be taking in any extra debt than if we had capital repayment, or pose any extra risk to the bank (as we have a payment plan in place). That seems unfair, and that we're being punished for having an endowment that the bank sold us in the first place!

jasehel

By the way, our lender is HSBC.

kingstreet

Unfortunately, those of us who do the job for a living never get any experience of HSBC, so you're likely to be short of professional help on this.

TBH lenders can do pretty much what they want with their interest-only criteria and in HSBC's case, they don't publish it, unlike other lenders, so we have no way of seeing if it is consistent.

opinions4u

But can anyone comment on the LTV thing?

Once you're up against lending policy, you're probably going to struggle.

A point to clarify - is there a 75% limit for interest mortgages with no recognised repayment vehicle (e.g. endowment) and does this still apply where there is an endowment policy in place? In other words, do HSBC know their own lending policy? (I don't, it's a long shot, but there could be differences).

Second consideration: If you surrendered the policy and used the proceeds to borrow less, on a repayment basis, would this be affordable? (Note, it's an option to consider, but some policies have a mortgage guarantee and the loss of life cover may need replacing at a higher cost).

Another option, is a longer term for all the borrowing possible, to make it affordable on a repayment basis? You could then keep the endowment policy going separately and decide what to do with the proceeds when it matures (e.g. reduce debt, supplement pension provision, new car etc).

Thrugelmir

As you stated, HSBC does appear to have a clearly defined policy with a 75% limit. OPU's suggestion of cashing in the endowment may be the best option. Then switching the whole of the new mortgage onto a repayment basis..