Ah, those heady pre-2007 days. A simpler, more innocent time where a man could sport an ‘ironic’ mullet without ridicule, TV stars of the ‘70s could sleep easy at night, and you could get an interest-only mortgage just as easily as a bag of sherbet lemons.
At this point we should probably interject and explain exactly what an ‘interest-only’ mortgage is.
No, wait, come back!
Rather than your bog-standard, common-or-garden repayment mortgage where you pay back what you borrowed (and interest) every month, interest-only mortgages require the borrower to just pay the interest on the loan.
Borrowers either have to put money away every month to help pay the mortgage back at the end, or (and this was the idea during the boom years) they could eventually pay it off using the vast amounts of moolah they would inevitably make on the property’s growth in value. The years of relatively small monthly repayments would leave them with with plenty of cash left over to invest in that bijou converted farmhouse in the Malverns.
What could possibly go wrong? Nobody really envisaged that house prices would actually go down. How could that happen? Weren’t you watching ‘Location, Location, Location’?
Er, yes. Well. It didn’t quite work out that way.
After the banks went into meltdown in 2008, they stopped giving mortgages out quite so freely. That meant that demand for houses declined. And - as anyone who’s taken a stroll through the aisles of TK Maxx will tell you - when there isn’t much demand for something and there’s a surplus of it on the market, the price drops. Just look at those lurid purple fashion slacks - £8, reduced from £75! Bargain!
And that leads us to where we are now. Thousands of people who took advantage of interest-only mortgages have discovered that they’ve got a problem on their hands. In lots of cases, the value of their homes has plummeted.
This means they’re trapped in an unpleasant financial limbo known as ‘negative equity’ – where they actually owe a lot more than their house is worth, and don’t have the savings to make up the shortfall. According to the FCA (the regulator formerly known as the FSA), the average shortfall is £71,000 - which by anyone’s reckoning is quite a lot of money.
This is quite clearly a dire situation to be in, so the Money Shot got in touch with mortgage experts London & Country to get a few ideas on what to do if you’re trapped in negative equity on an interest-only mortgage.
Think about overpaying
“Realistically, corrective action is likely to involve increased payments – because, in essence, the issue is that people haven’t been paying enough,” says London & Country’s Peter Gettins. “Simply overpaying is one route, which has the benefit of giving the borrower a degree of flexibility about how much they pay and when.”
Most schemes will allow up to 10% of the loan be repaid each year without charge, but it’s important to check individual circumstances. Also, because there’s no fixed structure to overpaying, you need to monitor your progress and make sure you’re on track.
Switch to a repayment basis?
You can switch some – or all – of your mortgage to a repayment mortgage. This can be arranged quite easily by your lender, but there’s usually a fee involved. Bah!
In order to keep your costs down, you might be able to extend the terms so you won’t be paying quite as much every month. But remember that this means you will be paying more interest in the long term – and if this extends into your retirement, you’ll still have to meet the repayments from your pension.
Those low interest rates might be rubbish news for savers, but they’re not bad if you’re shopping around for a mortgage. If you’ve got 15% equity, you could potentially scoop a 4% fixed mortgage for five years. Got 30% equity or more? Then you might even be able to get a five-year fixed rate below 3%.
If you can’t switch…
While the FCA makes it quite clear that paying off the loan is the borrower’s responsibility, there is plenty of guidance for lenders on how to help customers in difficulty.
“Anyone anxious about their situation should get in touch with their lender,” reckons Peter Gettins. “Most importantly, don’t put it off. The sooner any shortfall is addressed, the easier it will be to manage.”
SHORT CHANGE - THE WEEK'S MONEY NEWS IN BRIEF
BAAPS – the British Association of Aesthetic Plastic Surgeons (no, really) – has got together with Lloyds TSB to arrange a financial protection scheme for patients. BAAPS president Rajiv Grover plugged “'this is a truly innovative insurance package”.
Ofgem is launching another enquiry into energy firms being up to no good. That’s what they do, after all. This time, the investigation concerns energy firms “failing” consumers.
Some laws came into force which the experts hope will stop car insurance prices being so out of control – lawyers will now only be able to charge a maximum of £500 for processing simple claims. Previously, they could charge £1,200.
Taxpayer-owned banking giant RBS could be sold off as early as next year.
A spot of research from Esure found that about 20% of drivers would fail their driving test if they had to sit it again.
ON COVERED MAG THIS WEEK
If your home is new, expensive or in London then you’ll probably dance a jig in celebration on reading this news on house prices.
The Co-op made some pretty impressive claims about how much cash its telematics customers are getting back for safe driving.
Fan of eating, drinking, smoking tabs or using your phone behind the wheel? You’d best give it a miss.
With the hype around the new Wraith reaching fever pitch, Dan Bevis wafted in to deliver this piece on Rolls-Royces in unusual circumstances.
We delved deep into the musty recesses of the Covered mag vault and returned with this classic feature on the world of Reliant enthusiasts from Dave Jenkins.
Pedestrians in Dorset are being plagued by a new menace – yobbish mobility scooter drivers.
There has been a massive 60% spike in anti-social incidents involving the battery-powered personal transportation aids in the sleepy southern county, with reports of boozed-up seniors terrorising passers-by and supermarket aisles being used like the Santa Pod drag track.
Under current laws, drivers don’t need to have a licence to operate one, but they do need to be registered with the DVLA. The Money Shot was also surprised to learn that drivers as young as 14 are able to get their hands on one.
With the price of young person’s car insurance on a seemingly unstoppable rise, it’s certainly a creative way of solving the question of getting around affordably…
JOIN US next week for another THRILLING instalment of THE MONEY SHOT.