interest only mortgage with property as repayment vehicle

worriedne

I am posting in the forum in the hope someone might have been in similar circumstances or might have industry knowledge to give some help.

Our mortgage ends in 7 years but for a variety of reasons we are now struggling to make payments (no arrears.)

An interest-only mortgage for a couple of years would solve our problems. We have a lot of equity in our home (around £300k) and had heard we could use that as the planned repayment vehicle - eg clear the interest-only mortgage when we sell.
We desperately don't want to sell at the moment - my husband is in poor health and we have a school age son and, due to hubby's health the house is not in the best condition it could be to put on the market.
We tried looking for an equity release - the type you can get over a certain age since we are both past 55 but were told we are not yet old enough to raise enough to clear the outstanding £85k mortgage.
I figured our mortgage lender would be able to switch us to an interest-only mortgage but they say we wouldn't qualify because we can't use equity as repayment vehicle and we don't currently earn enough to qualify for mortgage (so basically they would rather we default and lose our home than allow us to switch to an option we could manage with - so much for helpful banks!)
I really thought that given we have excellent security, we would have no problem getting a loan/investment/mortgage to clear the existing mortgage and give us time to get back on our feet.
We do intend to downsize in about 7-8 years if possible once our youngest has flown the nest/we have undertaken some much needed renovations.
Has anyone any similar experience and found a way out - it is so depressing to think that we could lose our home at our age in life and within 7 years of getting clear of the mortgage at last!
With thanks for any advice. (I know lots of people will have little sympathy given that we have so much equity but we really love our house and have been here over 20 years and along with hubby's ill health, moving would be really difficult and we would also lose out since we could get at least another £30-£40k if we carried out the work needed.
thanks again

kingstreet

worriedne wrote: »

we don't currently earn enough to qualify for mortgage

Regardless of your repayment vehicle issues, if your incomes are too low to meet lender affordability you will be unable to proceed.

Affordability for an interest-only mortgage also uses a repayment mortgage over the same period as the affordability benchmark.

worriedne

Hi Kingstreet,
Many thanks for your reply. It seems totally wrong to use the repayment mortgage scale for affordability since the payments would be so much less with interest-only!
We have seen a new type of equity release where you don't make any payments at all but when you sell (or when you want to repay), they take 40% of any increase in your property value since you took out the borrowing - plus the amount originally borrowed.
On the face of it, it seems a good solution but I wonder if experts know of downsides we haven't considered?
One worry is how they value the property at beginning and end. If it's just a local valuer/estate agent, I guess that would be okay but if they have their own valuers I guess there's quite a risk that they will undervalue at the start and overvalue when you want to repay.
I have also read that equity release can be taxable - but surely not if it's to pay off an existing mortgage on the property?
thanks again

shortchanged_2

worriedne wrote: »

Hi Kingstreet,
Many thanks for your reply. It seems totally wrong to use the repayment mortgage scale for affordability since the payments would be so much less with interest-only!

It's not totally wrong because interest only mortgages have been used and abused by many for years, hence the reason for the current clampdown on them.

You do realise that the idea of a mortgage is a loan that has to be paid back and if someone can only afford the interest only payments then they can't really afford the mortgage as it severely limits their ways of paying the loan off.

HappyMJ

If you have an existing mortgage you can come to an arrangement to pay a lower figure each month. I would not remortgage in your case. You will not lose your home if you make some effort to pay as much as you possibly can. Mortgage companies are reasonable and will listen to you. You must pay something reasonable though.

If you need money to carry out some work on the house and your credit is very good, your income high enough and your existing debts are low then you could consider a personal loan but the monthly payments on that would be much higher.

You could also consider credit cards with 0% interest on purchases then over the next few years balance transfer the debt around and pay them off in full when you sell.

Thrugelmir

Down size now as you've £300k of equity. Interest only isn't really the solution as your budget will become ever constrained as interest rates rise.

ACG

Can you extend the term?
What about tieing in to a new deal? never a good if you are struggling to pay but it may help in the short term.
What about getting a lodger?

worriedne

Thanks guys.

We have a school age daughter and another who flew the nest is back for a while so no spare rooms to rent at the moment (and using the final bedroom for business since our workroom is full to the brim at the moment.)
Yes, moving would solve the problem but we've been here over 25 years and love it. desperately want to stay another few years and my husband is not in best health so want more time to get the place upto scratch because we reckon we could make at least £25k more on sale if we deal with some issues.
We wouldn't struggle if we can get interest- only and that is the most frustrating part of it all.
Plus our new business is gradually picking up so income should increase quite a bit in the next 36 months or so.
If anyone can suggest any investment places I could try, please let me know.
Thanks again - I really appreciate it.

ACG

There will be lenders who will lend you say £50k.
This would ensure you have money for your repayments for the next few years but you will pay through the nose for it - circa 10% plus fees. You could do that on interest only or repayment but is that helping the issue or putting you in a worse position as you are increasing your expenditure and reducing your equity.

worriedne

Thank you for the info. I can't find any online who will lend with our current income - although we have good credit history.
If we could do that for even three years it would give us breathing room and if property prices stay the same or even increase a little more, we wouldn't lose out too much.
How would I find that?
Thanks again

Funny_old_game

You are the stereotypical borrowers lenders want to avoid today. Albeit you have equity however interest only lending in any form is considered high risk.

You're not good borrower quality I'm afraid when there are 000's q'ing up in better low risk positions than you.