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11:46 AM, 16th February 2012, About 12 years ago 25
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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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Ben Reeve-Lewis
6:59 AM, 17th February 2012, About 12 years ago
The bigger financial side is something I never get Paul, not my forte, I just concentrate on trying to save the home using regulations and laws., same as my landlord/tenant work.
I attend the county court user group meetings where us lot who find ourselves there several times a week get to chat to the judges over a tea and biscuits and moan about how there is no need to shout at us haha and I met a guy there recently who used to be the head of mortgage repossessions for a very well known high street building society, now working in social housing. I asked him why they fought so hard against us when we know from the off that their case wouldn’t get past the judge and his reply was this “We know you guys always quote section this and regulation that and quote case laws and we don’t even know what they are, it isn’t that complicated on our side, its just a case of ‘get the money or get the house”
He even fessed up, when questioned about missing consent letters (signed authorisation for us to talk to the lender) go missing, he looked a bit embarrassed and said “We just throw them in the bin Ben”. Every bank does this, so I knew it was no accident. I staple it about 10 times to the letter I send and I send it recorded delivery these days because it happens routinely with every lender but when you ring them to negotiate they always say “We have your letter on file but not your authorisation letter so we cant discuss the case with you”, and so the fees and charges keep rising. Its more income generation.
I have one woman in arrears paying a second charge mortgage at only £125 per month. She negotiated her own agreement to pay £150 per month, thus in theory knocking the arrears down by £25 a month, but all the time she is in arrears the file remains with the litigation team and the litigation fee runs at £115 per month, so she is getting nowhere.
Another common dodgy fee trick is where a borrower takes out a second charge mortgage of £30,000 with payment protection insurance of say, £5,000 cover for unemployment, sickness and wot not and when you look at the small print you find the loan itself, has that £5,000 added to the loan, making it a £35,000 loan and when you work out the interest rates, yes the loan is at a decent rate, 4.4% for instance but the interest on the PPI is 60-70% and often the PPI cover ends after say 5 years but the monthly payments have to continue for 10 years. Its really scandalous the dirty tricks they get up. Most borrowers aren’t that savvy. I never was until I started doing this work.
I’ve put my years in facing down ‘Big Ron’ and his baseball bat in a scuzzy Old Kent Road bedsit trying to harass his tenant. Banks are doing the same thing but they just hide behind the law to do it. At least you can usually reason with Big Ron…..albeit from a few feet away haha
10:21 AM, 17th February 2012, About 12 years ago
Sounds to me like the banks are behaving in a fraudulent manner and actually committing fraud by illegally disposing of your consent letters and lying that they haven't received it.
Don't banks copy every bit of correspondence that comes in.
I'd do a SARN or rather get the mortgage holder to issue one.
If it comes back as the consent letter was with the records and they say they never received it; you've got them for fraud.
I'd then report it to the police.
14:01 PM, 17th February 2012, About 12 years ago
Doesn't the Interest Only/SMI equation change depending on how far the borrower is through the mortgage term? e.g. It's more advantageous to remain on a Repayment mortgage towards the end of the term when the SMI payment exceeds the interest due?
Ben Reeve-Lewis
14:22 PM, 17th February 2012, About 12 years ago
Knowing and proving it are different things unfortunately.
I do SAR letters requesting 6 years of fees and charges, talk about making a rod for my back haha the file comes back as thick as a phone book and I dotn have the time to wade through it
15:36 PM, 17th February 2012, About 12 years ago
Because SMI is calculated on the outstanding balance, it doesn't matter about how far thru the term it is.
15:42 PM, 17th February 2012, About 12 years ago
Is it likely that a Judge would order (or otherwise force) a lender to convert the mortgage to interest only to allow the maximum benefit from SMI?
Ben Reeve-Lewis
16:06 PM, 17th February 2012, About 12 years ago
I dont think judges have those powers to interefre in the conduct of primary mortgages, I know that have wider powers in Time Orders, to vary conditions, rates and fees etc but I have always worked on the basis that the only 'In' you have defending a repossession that isnt subject to time orders is Section 36 Administration of Justices Act to adjourn and suspend etc.
In my experience judges always state they cannot interfere with the contracual provisions between lender and borrower and are even reluctant to deal with cases on a time order basis even when they apply
Matchmade
9:17 AM, 21st February 2012, About 12 years ago
I have great sympathy with Ben's line of argument and agree that some lenders' attitudes to arrears are hard to understand.
Paul, NRAM are trying to reduce their mortgage book all round: I have two NRAM houses on BTL IO mortgages at 1% above base, on which I've never missed a payment and am making very good rental profits, and they've just sent me a glossy newsletter with dire warnings about the future and urging me to switch lenders and/or pay down my mortgage. It's the first time they've done this so clearly something's changed, perhaps within their own strategic plan to run down their closed mortgage book, or after advice from the FSA.
I'm going to ignore them and hang on to my pre-2008 mortgages as long as I can, because the interest rate is excellent and I don't wish to pay down a penny of my mortgages: as a small developer I want to hang onto as much of my capital as possible, so I can grow myself into a position where I can build my houses for cash and avoid dealing with any banks at all. At the moment the only loans available to small builders are mezzanine finance which charge credit card interest rates on both the loan to cover the land cost and the loan towards the buillding costs: that's 22-25% p.a. on £200K+ per property.
Repayment mortgages may be a sensible idea for the ordinary working person on an average PAYE salary, but these changes of policy on IO mortgages represent another attack on the self-employed and small business people, following the removal of self-certification mortgages. Both types of mortgage are great for anyone with a variable income and much of their capital tied up in businesses trying to make a profit, because they trust you to generate the income necessary to cover the mortgage and ultimatly pay off the debt. I will submit to the overpayments required by a repayment mortgage if there is no alternative, but I much prefer interest-only: the borrower gets to hang onto his or her capital, meaning you can use the capital more profitably elsewhere until you choose to pay off the mortgage, plus inflation is steadily decreasing the real value of your debt.
Ray Boulger from mortgage broker John Charcol commented: "The recent interest-only criteria changes are being driven by the draft Mortgage Market Review (MMR) published by the Financial Services Authority in December". This is still out for consultation, so perhaps Ben and his colleagues should make a submission to the FSA to explain the ramifications of what is being proposed for borrowers in arrears?
9:31 AM, 21st February 2012, About 12 years ago
Bear in mind:
1) It is not a bad idea to place landlords in a position that they are paying off the capital as they go - since very few lenders want to keep the loan 'active' - so to speak - once the term is up. Suddenly a lot of landlords who thought they had pensions will have to let go of their property (something nobody seems to be worrying enough about). They will have nothing - except perhaps a huge debt as they are on top of the forced sale have to do so in negative equity. This is something that paying off the capital protects the lender from, but it also buffers the landlord's purse as well, lowering the final debt or negating it. Maybe, much as I like interest only, for people (perhaps including me) without top notch monetary skills and reaonable luck there is good sense to this as we (the hungry landlord masses) might all be children playing in the 'now'. Still, I will miss my favourite toy.
Ben Reeve-Lewis
9:32 AM, 21st February 2012, About 12 years ago
Yes Tony it is a hidden aspect of the changes. Because of the job I have to do when I read announcements like this I automatically see it in the context of home saving but it is always written from a purely financial perspective.
When the FSA produced their report in June frowning on IO mortgages we complained to the government’s Homes and Communities Agency who we work closely with to bring our concerns to the FSA but nothing changed, the FSA are concerned with financial markets not housing or homelessness.
Last week I did 6 mortgage repossession cases in court and won each case, based on adjustments of interest only coupled with SMI payments. If lenders crack down on IO mortgages then it is likely that when faced with a similar week in 6 month’s time all 6 families would be repossessed and have to be rehoused as homeless families.