100 % Interest Only Mortgage Want to Convert to Standard Repayment

[stigofthedump]

Hi I am trying to obtain some help for some close friends who naively accepted a 100% interest only mortgage about 8 years ago with no capitol repayment plan put in place. They bought the property in Scotland at peak price period.

 

It is a sought after area outside Glasgow 5 min walk to a station with a 15 min commute into Glasgow City Centre. The area has been a low turnover in regards to property sales but downside has been an elderly population who have lived there all their lives.

 

Over the last five years a significant number of properties have hit the market from deceased or elderly moving into homes. Some of these properties have required significant modernisation due to the older generation not updating the properties. This has led to average prices falling and bargain prices on those properties. Naturally most have been modernised now but this has impacted on local values in terms of a falling average sale price.

 

 

Basically my friends need to rid themselves of the interest only mortgage but are concerned if they approach the lender who discovers there is no capitol repayment plan in place it will have a negative impact and could result in the mortgage being called in.

 

 

The have had hefty loan and credit card debts putting children through education but now the children have left home and work, they have concentrated on paying off these debts.

 

 

There is no question they can afford to make the repayments on a standard repayment mortgage given the amount of other debts they have cleared.

 

 

The downside is the property is in negative equity and a general read through the internet does not off much hope on them being able to remortgage. Loan aprox £135k value of property £100-£120k depending on valuation. They are in need of replacement windows and a new kitchen and possible rewiring which may impact on any valuation.

 

 

I guess I am seeking any opinion that may help me to guide them.

 

 

Sorry for the long post but any advice would be helpful. I think the broker who sold the product didn't reinforce advice about capitol repayment.

Edited February 6, 2015 by citizenB
formatting for easier reading

[citizenB]

If they go for part interest/part repayment or full repayment, both will be significantly higher repayments and if they have a lot of debts already this could impact their ability to apply/obtain a loan

 

Could they not pop some money into long term ISA or other savings account, monthly - which could then be used to repay the capital ?

[stigofthedump]

If they go for part interest/part repayment or full repayment, both will be significantly higher repayments and if they have a lot of debts already this could impact their ability to apply/obtain a loan

 

Could they not pop some money into long term ISA or other savings account, monthly - which could then be used to repay the capital ?

 

Thank you for your reply.

They have paid off most of their other debts now so higher repayments would not be an issue. Its more will a lender allow a conversion to a full repayment.

[theoldrouge]

Thank you for your reply.

They have paid off most of their other debts now so higher repayments would not be an issue. Its more will a lender allow a conversion to a full repayment.

 

cant see any problem at all with this, the lender will welcome the issue being addressed

[mercyblue]

I would have to disagree with theoldrouge on this - dependent on who the lender was. Most of these loans would have been provided by firms such as lehman brothers (southern pacific in the uk) and as such packaged up and sold into an spv within months (lookup eurosail on google for various prospectus). As such all you are paying is the administrator, capstone, etc so you're chances of getting it altered are pretty much nil.

If you read one of these prospectus its clear that there was never any intention that these loans were/are expected to run the entire term but that they would all be liquidated, by whatever means, years before.

[theoldrouge]

I would have to disagree with theoldrouge on this - dependent on who the lender was. Most of these loans would have been provided by firms such as lehman brothers (southern pacific in the uk) and as such packaged up and sold into an spv within months (lookup eurosail on google for various prospectus). As such all you are paying is the administrator, capstone, etc so you're chances of getting it altered are pretty much nil.

If you read one of these prospectus its clear that there was never any intention that these loans were/are expected to run the entire term but that they would all be liquidated, by whatever means, years before.

 

interest only mortgages were provided by nearly all mainstream lenders at that time

[citizenB]

stig, can you let us know if it is mainstream or sub prime lender that you have the mortgage with ?

[theoldrouge]

as from 1/4/2014 all regulated lenders Prime and subprime must comply with PRIN,principles for business FCA

 

to ignore a customers request to put in place a repayment strategy over the existing term of the mortgage

 

would be not only a breach of PRIN, but also of Mcobs

 

the OP should read the FCA Themeatic Review of Interest Only Mortgages

 

http://www.fca.org.uk/static/documents/guidance-consultations/gc13-02.pdf

[mercyblue]

Ask about part redemption i.e paying off a lump sum. That should always be possible regardless of the lender (its reducing the mortgage pool and hence risk). Probably best if its enough to take it out of negative equity I would have thought.

There is provision in sub prime lenders terms for that - I have just looked.

[BornThisWay]

I think the point you are missing Old Rouge is that the home is in negative equity. They are servicing a £135K interest only loan on a property worth £110-£120.

 

 

In my opinion (and I have worked in this area) no lender will touch it.

 

 

The only option is to save enough money to pay off sufficient to bring the loan down to a maximum of about 90% of the value or the property and then convert.

 

 

There is absolutely nothing to stop this couple using spare funds, as they arise, to pay down the loan within the parameters of any penalties applied, and of course they can start a savings vehicle at any time to create a lump sum to pay off the capital in the future.

 

 

Bear in mind that the facility now exists, for example, to take lump sums from pensions in excess of the current tax free lump sums (25% of the fund) and many people will be using these in the future to pay off interest only loans.

 

 

I would do nothing while they are in negative equity.

[bhall]

If the interest rate they have at the moment is acceptable to them, they could just check with their current lender if there are any restrictions on making over payments to the mortgage loan account. If there aren't, they can just make higher monthly payments to the account (ensuring that they request, on a regular or at least on an annual basis that any prepayment balance is used to reduce the capital, some lenders will do this automatically some don't, it will also depend on your mortgage product).

 

Some lenders only allow lump sum payments - if this applies to your friend's lender, your friend could open an ISA or other savings account and pay any additional amounts, they can afford to that account and then make a lump sum payment from that account to the mortgage.

 

This will mean that the interest will be paid and additional sums paid will reduce the capital, in a similar way to a repayment mortgage.

 

Personally, I would speak to the existing lender and sound them out a little. After all, your friend is not looking to apply for a new mortgage, they just want to convert their existing mortgage from an interest only to repayment - there is no additional risk to the lender as their exposure (the amount borrowed) remains the same

 

Might be worth a read http://www.out-law.com/articles/2013/august/interest-only-mortgage-providers-must-treat-struggling-borrowers-fairly-warns-regulator/

[theoldrouge]

If the interest rate they have at the moment is acceptable to them, they could just check with their current lender if there are any restrictions on making over payments to the mortgage loan account. If there aren't, they can just make higher monthly payments to the account (ensuring that they request, on a regular or at least on an annual basis that any prepayment balance is used to reduce the capital, some lenders will do this automatically some don't, it will also depend on your mortgage product).

 

This will mean that the interest will be paid and additional sums paid will reduce the capital, in a similar way to a repayment mortgage.

 

Personally, I would speak to the existing lender and sound them out a little. After all, your friend is not looking to apply for a new mortgage, they just want to convert their existing mortgage from an interest only to repayment - there is no additional risk to the lender as their exposure (the amount borrowed) remains the same

Agree with this as there seems no mention of applying for a new mortgage

 

On existing mortgage the FCA guidance provides for either strategy

[BornThisWay]

Don't forget that with the tightening of lending criteria some borrowers have been told by their own lenders that they cannot apply for a better deal in house because 'they cannot afford' their own mortgage!

[theoldrouge]

no ones advising a better deal,no ones advising a new mortgage, merely to put a repayment strategy which they can afford, in place with their existing lender., within the term of the existing mortgage

 

read the FCA guidance