My daughter is terrified of losing the house she bought 15 years ago when she and her husband were newlyweds.
They sought advice from a mortgage broker at the time and advised them to take out an interest-free mortgage as they had a fairly low income.
Her marriage ended a few years later and she has had to make the payments on her own ever since.
Her payments have risen steadily since the cost of living crisis from £280 a month to the current figure of £840 and she is now struggling greatly as she has had to give up work due to various health problems and is now living on benefits.
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The mortgage bank has now written to her and asked how she plans to pay off the mortgage in full at the end of the term, i.e. in just under 10 years.
Is it possible that she can refinance while receiving benefits and thus switch to a repayment mortgage? Your current mortgage lender has said they won’t do that.
I realize she still has a few years left, but perhaps she could do something now to prevent homelessness in the future? SD, via email.
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David Hollingworth answers: It may feel like everything is going badly for your daughter at the moment, but it is important for her to understand the situation so that she is at least more aware of what her options are.
Circumstances were against them and going from having two borrowers paying the mortgage to making the payments alone must have been difficult enough.
It can often be difficult for the partner remaining in the property to prove to the lender that the single-name mortgage is affordable once the other partner has left the mortgage.
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Challenge of affordability
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 general circumstances and the type of benefits received.
You probably want to know how long the benefits last and whether they are guaranteed to continue or can be verified.
Depending on the lender, some forms of benefits may only be taken into account in part when the lender decides how much it can borrow.
Pain after splitting the mortgage: It can often be difficult for the remaining partner to prove to the lender that the mortgage is affordable in a single name
A conversation with an advisor should help clarify whether switching to a new lender is possible and whether the level of income your daughter receives can meet the lender’s affordability criteria.
This helps identify the different types of benefit income and whether there is a sufficient amount to support a claim.
That might be a bit excessive given the nature of the monthly payments listed, but it will at least help her focus on the options currently available.
Of course, if health conditions change and allow a return to work in the future, the dynamic could change.
> Check how much you would pay with our best mortgage rates calculator
How does Interest Only work?
“Interest-only” does exactly what it says on the tin and only requires the interest to be paid monthly. This means that the mortgage balance will not decrease over the 25-year term.
The idea is that an alternative repayment vehicle runs alongside the mortgage, which grows over time and is used to pay off the mortgage at the end of the mortgage term.
Before the financial crisis broke out in 2008, borrowers could only claim interest if they paid less attention to the existing repayment instrument or its robustness.
Interest Only: These mortgages only require monthly payment of interest. This means the mortgage balance will not decrease
As a result, many borrowers would take out an interest-free mortgage with the sale of the property as a repayment vehicle.
Many will have intended to switch to repayment at a later date. Unfortunately, the longer the mortgage term, the more difficult it becomes to switch to repayment over the remaining original mortgage term.
For example, a £170,000 mortgage at 6% interest would cost £850 per month in interest only. If this were converted to repayment over the remaining 10 years, monthly payments of almost £1,890 would be required.
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Switch and pay too much
If your daughter hasn’t changed her plan, she may have switched to a standard variable plan. These could be significantly higher and be 8 percent or more.
Although the existing lender will not change the terms of the current mortgage, they should be able to offer alternative interest rates once a deal ends on a comparable basis, provided all payments have been made.
If possible, this could help improve the interest rate or provide some security of payment through a fixed deal.
Although there would be no repayment basis, most lenders allow overpayments, typically up to 10 percent per year, without incurring an early repayment fee.
This isn’t easy, but if the interest rate can be improved, there may be a little more room for overpayments to reduce the mortgage balance.
For example, £120,000 at 8.5% would cost £850 per month, but cutting to 6% would reduce interest-only payments by £250 per month.
It certainly won’t be easy under the current circumstances, but some overpayments could at least reduce the mortgage.
As income improves this would expand the range of options and could allow the mortgage to be restructured to a longer term on a repayment basis.
Alternatively, downsizing may be considered. Hopefully the equity in the current home will increase over time to make purchasing another home easier.
GET AN ANSWER TO YOUR MORTGAGE QUESTION
David Hollingworth is This is Money’s mortgage expert and broker at L&C Mortgages – one of the UK’s leading specialists.
He’s ready to answer your home loan questions, whether you’re buying your first home, trying to remortgage amid interest rate chaos or planning further into the future.
If you would like to ask him a question about mortgages, email firstname.lastname@example.org with the subject line: Mortgage Help
Please provide as much detail as possible in your question so that he can respond in detail.
David will do his best to respond to your message in an upcoming column, but he will not be able to respond to everyone or correspond privately with readers. Nothing in his answers constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.
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