Julian Knight: Interest-only mortgages – they're really not OK
Sunday 23 August 2009
Something like one in five mortgage holders in the UK are on interest-only deals, according to Moneysupermarket.com. Now that's more than I thought were on this type of mortgage. I always figured that it was one in seven or at most one in six but regardless, it's way too many. The take-up of interest-only deals was one of the most disturbing aspects of the boom. This is how it worked. Homebuyer talks to mortgage salesperson who explains that they can borrow some ridiculously high amount and still afford the repayments as long as they go for interest-only. The homebuyer is reassured that their property will be worth so much when it comes to sale time that it will dwarf any outstanding mortgage. Well, the past two years have given the lie to this.
Make no bones about it, an interest-only mortgage is almost always a terrible idea. Why on earth would you want to make mortgage payments for 25 years and then still owe what you borrowed in the first place? Time and again I have come across cases where people who shouldn't be touching an interest-only deal with a barge pole have been, for want of a better word, mis-sold. The worst cases involve people nearing retirement still on an interest-only mortgage – the only possible way they will be able to pay what they owe is to sell up. The only circumstances where it is advisable to go down the interest-only route is if you suffer a sudden drop in income and need to convert from repayment to interest-only for a short time while you get back on an even keel. Best advice? If you're on one of these interest-only mortgages and you can afford it, switch to a repayment loan as soon as you can.
Take the cash?
The saga of Aviva's reattribution scheme took another twist last week. So far, around three-quarters of policyholders have voted on whether or not they want to receive a payment of between £200 and £1,150 in return for giving up their claim on surplus assets held in the insurer's with-profits fund. Apparently, some 96 per cent of people who have voted have accepted the cash. Now the insurance giant has said it will extend the time limit for its offer to give the policyholders who haven't voted the chance to do so. The key is that only policyholders who cast a vote will be entitled to a payout, abstention means no cash. What's more, there is no guarantee that those who do abstain or vote "no" – thereby retaining their rights to a share of the fund's surplus assets – will get anything in the future. It's worth noting that during the two and half years that this deal has been hammered together the value of the fund's surplus assets has by some estimates halved. Understandably, most policyholders would like to take their cash – the bird in the hand argument. As for those who would rather take their chances, I have some sympathy for their mindset too. They may reckon that Aviva being so keen to get them to say "yes" could indicate that the surplus assets could be worth quite a bit more in the future, particularly as the recent market recovery is showing signs of having legs. But, whatever the reasoning, if you're a policyholder and you haven't voted then the best advice is to do so now.
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