Interest Only Mortgages.

[Traci66]

A friend of mine is on an interest only mortgage that is due to come to an end in a couple of years, she has nothing in place with which to pay off the mortgage as there is a lot of equity in her house and she was planning on seedling it in order to settle the debt. What she wants to know is if she hasn't sold by the time the term is up what would happen, eg would the bank extend the term. She will be 58 by then and is worried that she will not be able to remortgage at that age.

[factor-fiction]

There is a ticking time bomb here- lenders have been sending warning notices for a while but I think many people either haven't read them or understood them or, more likely, have just put the problem off to another day.
How long ago was the mortgage taken out. Interest only mortgages used to be endowment ones with an associated life policy, although for many the payout will not be sufficient to cover all the capital sum. Does she have any policies at all?
She could consider equity release or simply extend the mortgage.
Or she could sell up ad move to a cheaper property.
It'll be interesting to see how lenders deal with people who can't pay, especially if they are pensioners

[Traci66]

Thanks factor, the mortgage has been running for 18 years, she has no policies apart from the ones that pay out if she dies before the term is up, as I said there is plenty of equity in the property and this is what she was relying on.

[tiggerblue10]

I had an interest only mortgage which I took out with an endowment policy. I've been getting letters over the last 10 to 15 years telling me that there will be shortfall when the policy matures so I've been saving money and paying bits off here and and converting the rest into a repayment mortgage.

Can she afford to switch into repayment and extend the term?

[factor-fiction]

Are you sure about the policies? I'd be surprised if a lender would have lent money when there was no indication as to how the capital would be repaid. How much was the loan for?

[Traci66]

She's sure about there being no policy's, the loan was for £100k, the property is now worth approx £500k, she said she did take one out when she first got the mortgage but after she divorced she cashed it in to pay off her husband.
Tigger she can't afford to switch to repayment.

[yogasun]

Sorry to butt in, know nothing of finances - just to say that Sqad has asked you a question about medical matters on another thread

[Traci66]

Hi Yoga, who has Sqad asked a question?

[yogasun]

You, unless I'm mistaken on Body & Soul

[Traci66]

Thank you, just found it and replied.

[Old_Geezer]

Many will be on interest only because they can't afford to repay the capital and so certainly have nothing left to put away for any shortfall. I know 2 people in that position personally. And with no obvious solution they are just heading for the crunch. I suspect one is expecting to tell the council that they have nothing any more so it's their turn to get something back for a change. The other is assuming they will be able to somehow get into a cheaper accommodation, but given they don't much like where they are at present I can not see life seeming worthwhile if the standard drops further. In both cases it seems to me likely the lender will insist the home is sold leaving them in an awful position. I assume there are many cases like this after all the economy hasn't exactly been booming recently and few have achieved the improvements, over the last decade say, that they anticipated would ensure they're solvent.

[factor-fiction]

I'm lucky in that I have been planning for this by overpaying significantly on my interest-only mortgage by consistently overpaying each month and using my endowment mis-selling compensation and some of my redundancy money to pay reasonably sized chunks off the capital.
I wouldn't have wanted to be coming to the final year of my mortgage with the worry of how I was going to find a huge sum and being under pressure to sell.

But I think many people will hit a crunch point. Lenders have been sending out warnings for many years but I don't think the message has been strong enough and, whilst some people may have frittered money away they should have been putting aside for this, some people will have just not been in a position financially to do much about it.

I don't think lenders will want to force sales of houses on a large scale but I think partial equity release may be the answer for many people.

I think the government and banks know there is a big problem on the horizon but no-one seems to want to address it at the moment as it will just make banks and the government even less popular.

[ubasses]

I suggest she starts talking to her Bank now. At 58 if she still has income to meet the criteria of the loan she should be able to get a re-mortgage until 65 or even maybe 70. They will be looking for a soultion to repayment though. A good idea to would be to make overpayments each month to reduce some of the capital. If she can get a loan until 70 it could then be replaced with a lifetime equity release. It would probably a better idea to use any extra time granted to sell the property, buy something smaller and pay off all the debt.

[Peter Pedant]

It seems a bit unkind but since she never seems to have had a repayment vehicle of any sort then Plan A would always have been to sell up and pocket the profit.

SO why doesnt she do that ?

If the property is worth 500k now then 25 y ago when she got the interest only mortgage the capital sum would I estimate have been 50-100k. This is quite a lot to pay back in two years and still probably too much to do it in seven (when she gets to 65).

having had a mortgage when retired myself - I DONT recommend it. It does make things much tighter.

so it is - steal it, marry it or back to plan A

the bit I dont get is why start worrying now.