A question for those coming to the end of an Interest Only mortgage

Leon_W

The scenario is this.......


You have an interest only mortgage and are coming to the end of the contractual term. You have no repayment plan.


How have you been treated by your lender ?


The reason I ask is this. There seems to be an increasing number of posts regarding this situation where people ask what they can do and what the options are when the above happens but nobody follows up to let us know the outcome.


It seems to me that lenders are saying that the capital has to be repaid at the end of the term by whatever means which could mean remortgaging to another lender. This is a highly unlikely solution however as it's generally not going to be possible to repay the capital over such a short time for most people.


Yet..... I don't hear any stories of lenders repossessing houses because of this situation ? Why is that ? I can't believe that everyone is suddenly finding the capital repayment from somewhere or downsizing.


Therefore the question really is ..... Has anyone had their mortgage called in and been through the courts for repossession because of an interest only mortgage reaching the end of the term ? OR has the lender come to some arrangement to carry on paying interest only to avoid bad publicity maybe ?


I'd be very interested in peoples experiences.

Senior_Paper_Monitor

An interesting post ...


We have just had a case where the 72/68 year old clients were at the end of the agreed term - had fixed term investments coming out of redemption penalty in a little under 2 years (able to clear 90% of IO mortgage amount - <40% LTV on £630K property) and these produced good quarterly income lumps which was used in total to reduce the borrowing.


Pensions and 'hobby job' producing good income (but doesn't match MMR affordability calculation for 2 year extension) enabling them to pay IO payments during next years without any stress.


The lender refused to consider two year extension agreement but have extended 3 months - and I would be confident they will extend a further 3 months at a time over the two years but I will waste half a day submitting an explanation/application on each case (on what is a pro-bono case to help the IFA out who got the investment/mortgage 'out of synch').


What they won't do is 'commit' to a non compliant term extension (despite - in my opinion - MMR policy making it clear they can in such cases). Simply !!!! covering, since there is no way they will ever get (or even attempt in my opinion) a repossession in such circumstances.

BillJones

Leon_W wrote: »

It seems to me that lenders are saying that the capital has to be repaid at the end of the term by whatever means which could mean remortgaging to another lender. This is a highly unlikely solution however as it's generally not going to be possible to repay the capital over such a short time for most people.

Short time? People tend to have had years, or even decades to accumulate the necessary amount.

dunstonh

I dont know how MMR will affect these. Traditionally, the lenders would allow an extension where the person had a good payment history and was just looking for filling a shortfall. However, this is a full blown, term changing mortgage application that would fall under MMR qualifying criteria.

Yet..... I don't hear any stories of lenders repossessing houses because of this situation ? Why is that ?

Those people can equity release. Or they take their pension lump sums. Its early days after MMR though. So, we may see more in future.

Leon_W

That's what I'm getting at SPM.


I haven't heard of any repossessions at all. Not one. So what is going on ?


From a lender perspective it can't really be a big deal. You have people who are quite happy to continue paying the interest on the capital after the term has expired (MMR compliant or not) and yet, if the mortgage WAS repaid, the lender would just lend it out to someone else on roughly an equivalent basis. A net neutral position.


I totally get the point that the borrower has defaulted on the loan by not repaying the capital at the end of the term. It just seems to me that if it's still being serviced then the chances of a lender going ahead with repossession is slim.


Nobody seems to be saying though. You would have thought that someone has a story to tell how it went for them.


Edited to add. I get your point dunston but lets just say for this exercise that equity release isn't an option, there is no lump sum, interest only payments are comfortable and it would cost more to rent a property.


Regards

dunstonh

Edited to add. I get your point dunston but lets just say for this exercise that equity release isn't an option, there is no lump sum, interest only payments are comfortable and it would cost more to rent a property.

up a brown creek without a paddle then. Maybe its just because the volumes are currently low and large enough volumes havent got there yet. Although you can see there will be large numbers in future.

shortchanged_2

What part of 'the loan will be need to be paid in full at the end of the mortgage term' is it that people don't get?

Charlton_King

Oh, people 'get' it. It's just that the best laid plans can come unstuck.

The thread title describes precisely our position.

In our case, we could easily pay off the capital outstanding by selling one of the properties we own and let out (the mortgage is on our own house).

Since however the after-tax rent income is considerably higher than repayments on the mortgage, we feel that this would be an own goal and disposing of what we had always planned to be an income source for retirement.

The reason we still haven't yet paid down the mortgage in line with our original plan is that we were blown off course by the introduction of student loans and having to help our children pay off these substantial debts.

I suspect, as mentioned by the OP, that many thousands of people are finding themselves in our position for one reason or another... and the whole 'industry' seems, as is apparently par for the course in financial services, to have made a total dog's breakfast of any preparation for it.

SerialRenter

Charlton_King wrote: »

The reason we still haven't yet paid down the mortgage in line with our original plan is that we were blown off course by the introduction of student loans and having to help our children pay off these substantial debts.

Out of curiosity, have the bank expressed an opinion on this? Seems to me that would be seen as a purely voluntary expense on your behalf?

Repayment is generally not advised:
http://www.moneysavingexpert.com/students/student-loans-repay
Although i'm guessing they're post 2012 student loans? which does change things slightly.

Thrugelmir

The issue starts to manifest itself after 2020. Average shortfall on interest only mortgages is around £12k currently. As we're still at the end of the endowment era for many.

Estimates put the average shortfall in 2020 at £50k with some 200,000 or so people impacted. The shortfalls then progressively increase over the following years. Tracking the increasing in lending until the peak of 2007.

Be interesting to see how NRAM unwinds without the UK taxpayer having a bill to foot.

Thrugelmir

Leon_W wrote: »

Therefore the question really is ..... Has anyone had their mortgage called in and been through the courts for repossession because of an interest only mortgage reaching the end of the term ? OR has the lender come to some arrangement to carry on paying interest only to avoid bad publicity maybe ?

Hence why the FCA asked lenders to write to borrowers. Appears to have caused some change of behaviour.

A friend of mine had a £15k endowment shortfall. Santander weren't interested in granting any mortgage extension. There only offer was 2 months grace at the end of the mortgage term to allow a window for remortgaging. Nationwide were happy to offer a 3 year term for the balance.