I have an interest-only mortgage with Mortgage Express (Bradford & Bingley), which comes to an end in seven years’ time.
Mortgage Express is unable to offer me a remortgage, as it went under years ago.
My mortgage is for £180,000 and the interest rate is currently 7.5 per cent. The monthly payment of £1,038 is affordable, and the house is now worth £422,000, according to Zoopla.
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I’m worried about getting a mortgage elsewhere as I don’t have a great credit history, and what’s more worrisome is that I have no endowment to pay it off when it ends.
I realise I could sell up and downsize, but what other options do I have? I am 55.
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David Hollingworth replies: There are a number of issues conspiring to limit your options here.
The most pressing issue that you face is the overarching question of how you manage the mortgage so that you can keep the property, when the end of the term is edging closer and closer.
You have an interest-only mortgage which, as the name suggests, means you are only paying interest each month.
That means lower monthly payments than a repayment mortgage, but you are not reducing the mortgage balance gradually by paying an element of capital and interest each month.
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Interest only: These mortgages require just the interest to be paid each month. That means that the mortgage balance is not reducing
The traditional approach to taking an interest only mortgage was therefore that a separate repayment vehicle would run alongside.
Separate payments made into that repayment vehicle would then gradually grow over the life of the mortgage, to provide a lump sum that would be used to pay it off at the end of the term.
You mention endowment policies, which were commonly used as repayment vehicles at one time – but it could really be any savings or investment that could act as a possible repayment strategy.
No easy way to repay
In your case there is no formal repayment vehicle in place, which means that you now have a much more limited time-frame to make inroads into raising the capital. That could be through a number of different methods.
Switching the mortgage to repayment would of course be the ideal, and mean that the balance would be paid off over the remaining term.
However, on the current term and rate that would see a very substantial uplift in monthly payments. The monthly cost of £180,000 at a rate of 7.5 per cent over seven years would rocket to £2,761.
> Check how much would you would pay with our best mortgage rates calculator
Running out of time: Our reader has an interest only mortgage, which comes to an end in seven years’ time
It can be possible to put part of a mortgage on repayment with the remainder on interest only, which will limit the rise in monthly cost but also still gradually reduce the amount you need to repay.
Splitting the current balance half and half on the current terms would still see the payment rise to £1,943 per month and also leave £90,000 remaining in seven years’ time.
Making overpayments whether smaller regular payments or lump sums as and when you can from savings will also help reduce the mortgage balance. Again that’s unlikely to be practical over such a short time.
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Double check the open market
All of these approaches could see the cost mitigated a little by switching to a better rate – but your lack of choice is compounded by the fact that you find yourself stuck with Mortgage Express.
The demise of Bradford & Bingley has left your mortgage stuck with the ‘closed book’ lender, which no longer lends. It therefore doesn’t offer new deals to existing customers in the way that most lenders will.
That leaves you stuck with the high variable rate you are now on. It still makes sense for you to explore the options with other lenders, both from the perspective of improving the rate you are on and in exploring any option to extend the mortgage term.
Depending on how severe your credit issues are there may be lenders that can consider a remortgage.
If the marks on your credit file were relatively minor or happened some time ago, then some high street lenders may now be able to consider lending. That could also enable a move to a longer term, helping make a switch to repayment more affordable.
Some lenders can take a more flexible approach to their affordability for those that have been classed as a mortgage prisoner, trapped with a closed book lender and unable to switch due to the tighter affordability now in force.
Alternatively, your age opens up solutions aimed at older borrowers, whether a standard mortgage over a longer term or a more specialist deal such as Retirement Interest Only.
This would remain on an interest-only basis, but remove the need for a specified term and require the mortgage to be repaid on sale of the property, death or a move into long term care.
Building societies and specialists like Livemore and Hodge offer this type of product, but will still need to see that the monthly interest payments will be affordable.
It could allow you to remain in the property and give more time to reduce the balance, but you will need to consider your income now and in future.
Finally, downsizing should certainly be considered as a solution.
Your current lender may not have mortgage options on offer, but it does have support pages online and talking to it now about your concerns may also help form your approach.
