11:46 AM, 16th February 2012, About 10 years ago 25
I read with interest an article in the Daily Mail this week based on an announcement by Santander that they are radically over-hauling their policy on interest only mortgages. Now you can’t get an interest only mortgage from Santander unless you have 50% deposit to put down.
Business as usual, they can run things as they see fit.
For those of you that may not know, interest only mortgages (monthly payments of interest but no capital) have soared over the past few years as people gambled on property price increases covering the outstanding capital by the time the mortgage finished or as cheaper monthly mortgages underpinned by a known future pension or inheritance payout.
The recession raised cautious voices over interest only mortgages, with some banks refusing to grant new ones at all. In June 2011, the Financial Services Authority issued guidance to mortgage lenders that they should be very cautious before allowing people to convert their mortgages from standard repayment mortgages to interest only ones. They added that they need to look to future possibilities of payment before granting the switch.
Now here’s the rub. This article is not about buyers obtaining interest only mortgages from the off but the way that the contracts can be used to save people’s homes from repossession.
When I am not harassing landlords I am harassing banks in an attempt to save people’s homes. It’s a lengthy and sometimes mind-numbingly tedious procedure but at its root, the name of the game is to maximise people’s income whilst minimising their outgoings.
There are several ways to do this but the first port of call is to look to the type of mortgage and to see if the lender will convert to interest only, this will usually knock between £200- £400 a month off of the borrowers expenditure, sometimes even more.
If borrowers are on benefits, which is the usual reason for the mortgage arrears in the first place, and the mortgage was taken out for home purchase or essential repairs (not loan consolidation and a holiday) then they are usually entitled to receive a payment from the Department of Work and Pensions, known as ‘Support for Mortgage Interest’ – SMI.
This is paid for 2 years at a current rate of 3.68%. With many mortgage rates around the 4% mark, SMI will often cover most of the monthly mortgage payments if it is on an interest only basis.
The FSA’s guidance was a major – and very unhelpful – kick in the teeth for borrowers and people in my line of work who try to save their homes but to an extent I have found a certain degree of success by suggesting to lenders that they only convert to interest only for 6 months, after which time we will review the case and see if the borrower has regained employment. Some of the larger companies are ok about this.
It tends to be the larger lenders who are more reasonable and cooperative as opposed to the sub-prime, often second charge companies who behave like sharks in a feeding frenzy at the first sign of a missed mortgage payment.
Santander are one of the UKs largest mortgage lenders and I would estimate that about 15% of my clients are with them, which is what is so worrying about the latest announcement. Along with the 50% deposit rule they have also stated that anyone already on an interest only mortgage who has less than 25% equity or little savings may be forced to switch to repayment mortgages.
This, as can be seen above, would suddenly catapult the borrower already in financial dire straits into hundreds of pounds of extra monthly outgoings.
It doesn’t take too much of a stretch of the imagination to presume that in the light of their attitude to interest only accounts, asking them to convert a mortgage so that the borrower can obtain maximum SMI is going to be at best difficult but most probably impossible.
It is highly likely that many other lenders will follow Santander in some way.
Adjusting a policy on taking out interest only accounts is one thing, this was the basis of the Daily Mail’s article but the hidden aspect, which nobody has picked up on, is the devastating effect it will have on borrowers in difficulty.
Repossessions will be rising considerably in the coming year as a result.
I am not advocating that people change to interest only indefinitely. That can solve a person’s temporary difficulties but as the FSA point out it can set up massive problems for both borrower and bank in the future but in reality it isn’t what is usually needed.
Some people, the elderly or people with health problems and may not work again were never sensible candidates for interest only but the majority just need time to find employment again. The interest only/SMI equation has always been the perfect all round solution. The bank receives their payments and the borrower’s outgoings and income balance out enough for them to cope.
I will be keeping my own statistics on Santander cases over the coming months but it doesn’t look good.
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