Left in a fix by deferred rates: Fixed-interest mortgages have provided anything but a worry-free existence for some homeowners

WHILE many homeowners are benefiting from the current spell of lower mortgage interest rates, others are paying dear for succumbing to the enticements of the deferred-interest and fixed-rate arrangements that were on offer just a few years ago.

Fixed rates and deferred interest were attractive alternatives to the high variable rates five years ago when Karen and Will Looij first decided to buy their home in East Grinstead, West Sussex. But for the Looij family, the short-term fix has turned into a long-term nightmare - one from which they seem unable to escape.

Over the past three years, when variable mortgage rates have been tumbling from almost 13 per cent to less than 8 per cent, their rates have gone up. Yet they owe more money to their lender today than when they started out.

Their attempts to have their debt payments restructured have so far been spurned by their lender, First Mortgage Securities.

They have a deferred interest mortgage, first taken out in May 1989 when interest rates stood at 13.5 per cent. FMS then offered a deferred interest mortgage with initial payments set at 7.85 per cent. But the debt was still clocking up at 12.856 per cent, with the underpayment to be added to the loan at the end of the two-year fixed period.

Mrs Looij, a legal secretary, said: 'It seemed ideal. Our property had been valued at pounds 95,000. The mortgage was for pounds 60,000. We thought that whatever interest was added later, the house would still be worth far more than the total debt.'

The couple's mortgage loan was backed by a low-start Sun Alliance endowment policy, with premiums that began at pounds 55 a month but were to rise to pounds 110 over five years.

'Two years later, in May 1991, we owed First Mortgage Securities pounds 71,000, except that property prices had fallen and we were in negative equity. The company then came up with another scheme. This time it was an escalating deferral. The rate was fixed at 12.25 per cent, but we would only pay 8.25 in the first year, rising by 1 per cent every 12 months thereafter.'

In May, the rate rises to 11.25 per cent and they will be paying pounds 570 a month in interest alone. Next year, that will go up to pounds 670 when the rate hits its 12.25 per cent maximum.

Even worse, because the 12.25 per cent rate applied from May 1991, they owe their lender even more money.

Mrs Looij explained: 'We aren't complaining about the mortgage rates. What upsets us is that FMS has turned down our attempts to restructure what we owe.

'On top of the mortgage, we owe a further pounds 4,500 on credit cards and loans after my husband lost his job as an aircraft engineer. Our payments on that are pounds 200 a month.

'We asked whether we could surrender the Sun Alliance policy, which was worth about that amount, and use it to pay off our credit-card debts. We would be prepared to take out another insurance policy and assign it to the loan.

'FMS has said that we can only use that money to reduce the mortgage itself. But that would only cut our monthly payments by pounds 30,' she said.

The couple have since stopped payments on their Sun Alliance endowment, freezing its value, and have taken out a new one with Scottish Provident, which they say they are prepared to assign if they can surrender the old one.

Nick Deutsch, managing director at FMS, denied being unhelpful. He said the problem lies with his company's insurer, which indemnifies all FMS mortgages in the event of repossession and loss on any subsequent sale.

'If we allow the surrender of the security without the approval of the indemnity provider, it can withdraw our guarantee,' Mr Deutsch said.

'We approached the provider and put the Looij's case for consideration. We were told by that company that it did not feel it was a suitable case for us to realise the security on.

'We are sympathetic, but we are caught between a rock and a hard place.'

He said FMS was still prepared to approach the insurer - which he declined to name - and ask it to reconsider.

(Photograph omitted)