Consumer Rights: Act if you are worried about interest-only home loan
The time is looming for many to find money to pay off their mortgages. Do they have enough?
Saturday 18 May 2013
If you've been reading about interest-only mortgages with a growing sense of unease, it's time to act. Interest-only mortgages have helped many people afford to buy their homes but they don't suit every borrower and not everyone who took one out realised exactly what the risks were. Banks have become much less keen on interest-only loans and some have stopped offering them, and there's growing concern that some may have been mis-sold.
Paying interest only is cheaper than taking out a repayment mortgage so it has been an attractive option. But paying interest only means what it says – you're paying only the interest on the capital you borrowed but you aren't paying anything towards reducing that capital. If you borrow £100,000 you pay monthly interest payments but at the end of 25 years you still owe £100,000. The idea was that you saved into a separate fund each month so that you would have enough savings at the end of the 25 years to clear the £100,000 loan. Endowments and pensions were popular ways of saving. However, some endowment plans didn't do well in the early 1990s, leaving those people with too little to pay off their loans in full now. Paying into a savings fund to repay the loan hasn't been a condition of an interest-only loan since the 1990s so there are people who haven't been saving enough or not saving at all. The latest figures show that people who took out interest-only loans have saved about £72,000 less than they will need on average. many have saved nothing.
If you don't have a savings plan you may have money coming to you which you can use – a lump sum from your pension or an inheritance maybe. If you have no plan in place for paying off the capital you borrowed you need to act now. If you are thinking that none of this was explained to you at the time you took out your mortgage, or that if you'd understood the risks you wouldn't have signed up, you may have been mis-sold your loan. A mortgage adviser should have explained the risk and discussed with you whether you were prepared to take that risk. If you feel you didn't get the most suitable advice you should get advice.
If you don't have enough money to repay the loan when it becomes due your only option may be to sell your home. Some people will have planned all along to sell, pay off the loan and buy something smaller. But others won't want to move and still others will find they don't have enough left to buy a smaller home or that selling quickly is impossible.
If you knew what you were getting into and don't want to sell you need to act now. You are responsible for making sure you have enough money when the time comes. Even if you've got years before the capital has to be repaid any delay will mean you have to save more each month.
Talk to a financial adviser about how much you will need to put aside from now on to clear the loan on time and about whether it might be worth using any savings you do have to reduce the loan immediately. Even if you have a plan in place it might not be building up quickly enough and could leave you with a shortfall, so check regularly to see whether you need to be saving more into it. It might be possible to change to a repayment mortgage where you're paying part of the capital as well as the interest. Many people find this is too expensive but some lucky ones have managed to change to a repayment mortgage, extend the period of the mortgage and pay less each month. Ask whether there are arrangement and exit fees for changing.
Lenders know that some borrowers are having problems and are trying to make sure their customers are on course. Lenders have the option to take legal action to repossess and sell your home if you don't repay your loan on time but most will do their best to work with you to find a better solution. If you have a buy-to-let mortgage you may have less reason to worry. Most buy-to-let loans are arranged on an interest-only basis. Before they lend most lenders want to know that the rent you can charge for the property will be substantially more than the interest on the loan. If you've been saving that surplus you can use that to repay the capital borrowed. But if you don't have enough to repay your capital when the time comes it's not likely to be such an emotional wrench to sell a property you don't live in, provided it has increased in value and you can find a buyer quickly.
If you need help on any aspect of your interest-only mortgage contact the Money Advice Service at www.moneyadviceservice.org.uk
Q: I have just had a letter from the HR department at work to say that I was overpaid for several months last year. I think they are probably right but at the time I was doing extra work on a bid for a new contract and getting paid extra for additional hours and for acting at a higher grade. I didn't realise I was being overpaid – it never crossed my mind to check because frankly I had expected a bit more than I got. The firm wants the money repaid but I don't have it. Do I need to get legal advice?
FA New Forest
A: I think you should get legal advice. You may be able to have a half-hour appointment with an employment lawyer at an advice centre for free. Law centres also give free advice on employment issues. An employer can legally make a deduction from an employee's pay if there has been a genuine overpayment. As you accept you owe the money there are no grounds to argue that the overpayment isn't genuine or for refusing to pay it back. However you may be able to negotiate to pay the money back over time. If that doesn't work ask for an interest-free loan from them to help you through the following few weeks. Try to keep the issue separate from the job you're paid to do and the people you work with.
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