Spanish Steps: Tackling interest-only mortgage issues
I'm Fergus Muirhead and I'm here to answer any questions you may have about any money or consumer issues.
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Q. In 2006 I wanted to get a mortgage for a property I had seen in Mallorca. I went to a bank here and they advised me to deal with a bank in Spain. I sent a letter to them and asked if I could get a mortgage. I told them I wanted a half interest-only and half repayment mortgage. The deal was done through the internet. I was surprised it seemed so easy. The only time I saw or spoke to anyone from the bank was when it was time to sign over and get the keys. A lawyer came from the mainland to Mallorca and the deeds were signed. I have enjoyed my property and thought no more about it until last autumn when I went to another Spanish bank for a loan for my daughter who was buying a house. I gave my mortgage details and the manager asked why I was paying an interest-only repayment at my age. I had noticed that my repayment costs were low but thought it was due to the very low interest rates. I am now feeling very betrayed by the bank that this information was not given to me at the beginning. It means I still have to pay the full amount of loan - about 123,000 euros - when I am now retired. I am feeling quite concerned as I feel they have mis-sold me this mortgage. Name withheld
A. This question raises two very interesting and relevant points. Firstly, the issue of interest-only over repayment mortgages. If your loan is interest-only then you are effectively renting your house, and you need to find some way to repay the loan at the end of its term.
There are two groups of people who have interest-only loans. The first group consists of those who know that they are only paying interest and who have an endowment, pension or other means to pay the loan at the end of the term. The second group, and it sounds like you may be in this group, are not aware that they are only paying interest, and not capital.
Your loan will have an 'end date' and this will have been notified to you when you took it out and it is likely that you will have to raise this with Halifax and ask them to put this date back because, as you rightly say, if you move to repayment from interest only it will have an impact on your monthly repayments. The longer the term you are able to get the bank to agree to, the less the impact of this increase.
This also brings us to the second issue raised by your question, and that is the fact that your loan has been arranged to continue until beyond your normal retirement date. This should never have been allowed to happen since, as you point out, you are now going to have to continue to make mortgage payments out of your retirement income.
Having said all of that, you are where you are and I know that you are making headway with your bank as they try to work with you towards a solution. This solution will inevitably lead to you having to extend the term of your loan but as I understand it you are able to do that in a way that suits both you and the bank, so you may be able to salvage something out of this.
For anyone else reading this who has an interest-only loan my advice would be to talk to your lender as soon as you can. It may be that you are happy to continue with this arrangements and this just means that you will have to sell your house at the end of the current mortgage term, hope for an increase in value, and pocket that once you have repaid the loan.
If, on the other hand, you want to continue to live in the house beyond the existing mortgage term then you may need to agree an extension to the term of the loan, or convert to repayment now over the same remaining term. This will usually be possible but is likely to lead to a substantial monthly increase in mortgage payments.
And have a look at your loan agreement and check out the date at which it is due to end. If it is later than your expected retirement age then you have a choice - ask the lender to shorten the term so that it ends when you are still in work (this will mean higher monthly repayments) or leave it where it is and recognise that you will still be paying your mortgage out of retirement income.