Almost a decade on from the financial crisis and one dodgy lending product refuses to go away – the interest-only mortgage. Around a fifth of all residential mortgages in the UK are interest-only, according to trade association the Council of Mortgage Lenders, with almost two million people only paying the interest on their loan, and not repaying any of the capital.
The idea of these mortgages is that you get to enjoy relatively low monthly repayments, while simultaneously saving into another investment – or having some other plan – to repay the capital you have borrowed when the mortgage ends.
The problem with this scenario is that banks and building societies haven’t made sure that borrowers have a plan to repay the mortgage, and many people have simply been enjoying the low repayments, without giving a thought to how they will repay the loan.
In one situation recently reported in the Financial Times, a 66-year-old woman had taken out a £182,000 ten-year interest-only mortgage nearly a decade ago. She has since paid more than £70,000 in interest, but none of the debt. And because she made no plan to repay the capital of the loan, she now faces either selling up, or opting for an equity-release loan to allow her to clear the debt and stay in her home.
Unfortunately, many people with interest-only mortgages find it difficult to switch to a repayment mortgage, partly because affordability tests have been made a lot stricter since the financial crisis.
In one recent case, the Financial Ombudsman ruled that a bank should pay a customer the difference between what he had paid and what he should have been paying if he’d been accepted onto a better deal. This should set a precedent for those who feel they’ve been treated unfairly, but will depend on individual circumstances. On the right, we look at what to do if you’re trying to leave behind an interest-only mortgage.
How to ditch your interest-only deal
With interest rates at record lows, now is a great time to switch from an interest-only mortgage to a repayment deal. A cut to your interest rate should mean that your monthly repayments don’t rise too much, even as capital repayments start to be taken alongside interest payments.
You can either ask your lender to switch you from an interest-only product to a repayment mortgage, or you can shop around for a completely new deal. But before you start applying, take some steps to make yourself an attractive borrower. Get hold of your credit rating from Experian or Equifax, and check everything is correct. Both of these credit firms will also give you tips on how you can improve your credit rating, such as getting a landline and registering to vote.
Next, work out the loan-to-value (LTV) ratio on your home. That’s your outstanding mortgage as a percentage of the value of your home. So, if your house is worth £300,000, and your current mortgage is £180,000, your LTV is 60%. Get your property valued so that you are working with up-to-the-minute sums.
Once you have all this information, you can start to look at new products. If your application is rejected, make sure to ask why – you might need to consider a longer-term repayment mortgage in order to bring the monthly repayments down so you pass affordability tests.
If you are really struggling, consult a mortgage broker. They’ll be able to advise you on what you need to do to improve your chances of getting accepted, and they should also know which lenders will be most sympathetic to your financial situation.
In the news this week…
• “Stoozing” – the practice of getting an interest-free credit card and putting your money to work elsewhere – is not for the faint-hearted, but it can land you with a nice little profit, says Anna Mikhailova in The Sunday Times. Sainsbury’s is currently offering a 32-month, 0% deal, which gives you Nectar points on your spending, before reverting to a “punitive” 18.9% rate.
If you’re feeling braver, you could get an MBNA platinum credit card, which allows you to make a “money transfer” – it lends you money for 39 months, typically at 0% interest, that it pays directly into your bank account. It charges a one-off fee of 3.45% and you have to make minimum repayments of 1% of the outstanding balance during the 0% purchase period, so £75 per month if you borrow £7,500. But if you bank £3,000 of that with Tesco; £1,500 with TSB Classic Plus; and put £750 in a Halifax Reward account (which gives you £75 for signing up) and £2,250 in an NS&I three-year Guaranteed Growth Bond, you will make £779.25 over the 39 months. Deduct the £258.75 initial fee and you’ve made a profit of £520.50.
Remember, though, that current accounts only pay high interest for limited periods and there are rules on how much you have to pay in, withdraw and keep in your account. Break any of those rules and you risk losing your benefits and being stung with huge fines. More importantly, don’t run up credit-card debts that you can’t repay.
• Many drivers see their car-insurance premiums soar for a host of reasons that are seemingly irrelevant or beyond their control, says The Daily Telegraph. For example, it’s worth being aware that even if you are involved in an accident that wasn’t your fault, such as someone reversing into your parked car, you could still see your premium go up.
Other factors that can affect your premium are: how long you have lived in Britain (the longer the better); the way you describe your job (go for “housewife“ rather than “unemployed“); and living in a new-build house (the small amount of data will result in a poor insurance rating). Make sure you keep an eye on changes to your premium, as it might save you more in the long run to switch to a different provider.