My daughter is terrified of losing her house, which she bought 15 years ago when she and her husband were first married.
At the time, they took the advice of a mortgage broker and were advised to take out an interest-only mortgage as they were on quite a low income.
Her marriage ended a couple of years later and she has been making the payments alone ever since.
His payments have risen steadily from £280 a month to the current figure of £840 since the cost of living crisis and he is now really struggling as he has had to stop working due to various health problems and is now living on benefits.
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The mortgage company has written to you to ask how you intend to pay off the mortgage in full at the end of the term, which is just under 10 years from now.
Is there any chance you could remortgage while receiving benefits and therefore switch to a repayment mortgage? Your current mortgage provider has said it will not do that.
I realize you still have several years left, but perhaps there is something you could be doing now to avoid becoming homeless in the future? SD, via email.
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David Hollingworth replies: It may seem like everything is going against your daughter right now, but it is important for her to understand the situation, so that she can at least have a better awareness of the options that may be available.
Circumstances have been against her and going from two borrowers paying the mortgage to making the payments alone must have been quite difficult.
It can often be difficult for the partner remaining in the property to demonstrate to the lender that the mortgage will be affordable under one name once the other partner is removed from the mortgage.
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Their health problems and the impact on their ability to work will only exacerbate the affordability problem.
Lenders often accept benefits as income, but their approach to this can vary, depending on the wider circumstances and the type of benefits being received.
They likely want to understand the longevity of the benefits and whether they are guaranteed to continue or can be reviewed.
Depending on the lender, some forms of profit income may only take a proportion into account when the lender decides how much it can lend.
Post Split Mortgage Pain – It can often be difficult for the partner remaining in the property to prove to the lender that the mortgage will be affordable under one name.
Speaking to an advisor should help clarify whether switching to a new lender is possible and whether the level of income your daughter receives will be able to meet the lender’s affordability criteria.
That will help establish the different types of benefit income and whether there will be an adequate amount to support a claim.
Given the type of monthly payments quoted, it might be overkill, but at least it will help you focus on the options that are currently available.
If health conditions change and allow for a return to work in the future, then the dynamic could of course change.
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How does interest-only payment work?
Interest Only does exactly what it says on the tin and only requires interest to be paid each month. That means the mortgage balance is not reduced over the 25-year term.
The idea is that an alternative payment vehicle goes along with the mortgage and grows over time to be used to pay off the mortgage at the end of the mortgage term.
Before the financial crisis hit in 2008, borrowers could only collect interest with less scrutiny over the existing payment vehicle or its soundness.
Interest only: These mortgages require only interest to be paid each month. That means the mortgage balance is not being reduced.
As a result, many borrowers would take out an interest-only mortgage with the sale of the property as the payment vehicle.
Many will have intended to move to payment at a later stage. Unfortunately, the longer the mortgage lasts, the more difficult it is to switch to payment for the remainder of the original mortgage term.
For example, a £170,000 mortgage at a rate of 6 per cent would cost £850 a month with interest alone. If this were changed to payment for the remaining 10 years, it would mean monthly payments of almost £1,890.
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Change and overpay
If your daughter hasn’t changed her rate, she may have moved to a standard variable rate. These could be much higher, at 8 percent or more.
Although the existing lender will not change the terms of the current mortgage, it should be able to offer alternative rates once the deal is finalized on similar terms, assuming all payments have been made.
If that is possible, it could help improve the interest rate or provide some payment certainty through a fixed agreement.
Although a repayment basis would not be adopted, most lenders will allow overpayments, typically up to 10 per cent annually, without incurring an early repayment charge.
It’s not easy, but if the rate can be improved, it could give a little more room for some overpayments to be made to reduce the mortgage balance.
For example, £120,000 at 8.5 per cent would cost £850 a month, but a cut to 6 per cent would reduce interest-only payments by £250 a month.
Under the current circumstances, it’s clear that it won’t be easy, but a few overpayments could at least eat into the mortgage.
If income improves, the range of options would expand and could allow the mortgage to be restructured for a longer term on a repayment basis.
Alternatively, downsizing may be an option to consider. Hopefully, the equity in the current home will have increased over time to help purchase another home.
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David Hollingworth is This is Money’s mortgage expert and broker at L&C Mortgages, one of Britain’s leading specialists.
He’s ready to answer your home loan questions, whether you’re buying your first home, trying to remortgage amid rates chaos, or looking to plan ahead.
If you would like to ask a question about mortgages, please email: firstname.lastname@example.org with the subject: Mortgage Help
Please include as much detail as possible in your question so you can answer in depth.
David will do his best to respond to your message in a future column, but will not be able to respond to everyone or correspond privately with readers. Nothing in his answers constitutes regulated financial advice. Posted questions are sometimes edited for brevity or other reasons.
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