Cost Of Living Crisis Saving IDEAS

Statistical research by the Financial Conduct Authority highlighted that fewer than one million consumers had interest-only mortgages in 2022. Those maturing after 2030 could face difficulties paying the remaining balance. In 2015, the number of interest-only mortgage consumers was half the 2022 figure. There is growing concern due to added factors such as Covid-19, the cost of living crisis, and high inflation, which has increased prices, particularly for food, gas, and electricity. Additionally, there has been an increase in interest rates. Many people may not be able to clear their remaining balance, leading to an increase in repossessions, or forcing them to sell their homes and downsize or return to renting. This situation increases vulnerabilities, difficulties, and suffering, creating anxious times for numerous families with these mortgages.

I had some family and friends who were going through difficult circumstances, and their mortgages were due to mature at the end of the term. They were unable to pay the remaining mortgage due to stringent affordability criteria since the 2008 financial crisis, and changes in circumstances meant they could not remortgage. They were making the monthly payments, and if they could remortgage, they could keep this going for an agreeable number of years with the lender, until either the house was sold or the remaining balance was paid under a new remortgage term. Many of the people I knew going through this situation were either pensioners, families with additional kids – with one person working while the other supported the kids – or were made single parents or were caring for someone with health conditions. These circumstances had occurred after they had taken the maturing mortgage, so it was not their fault.

I’ am not saying this could be successful for your circumstance, though these strategies of correspondence and communication that I used for my family and friends to navigate with the lenders were helpful for them achieving the best option at the time when their mortgages were due to mature and unable to pay the remaining balance or remortgage with current or new lender at the time. All I can say is that I’m sharing ideas and cannot promise that this would work for your situation, though worth trying out if your options have been limited and don’t get into what’s termed a mortgage prisoner (people unable to switch mortgage to a better deal, even though the persons up to date with payments, most are with closed book inactive lenders).

Remaining Mortgage Balance

Before communicating with your lender, review your lender’s mortgage criteria regarding the current balance. This information can be found on the yearly statement or the lender’s website, or by raising queries through phone or email.

Please review the mortgage balance. If it has increased, the bank provides a few reasons for this. Kindly confirm if you fall within any of these categories:

– Missed one or more monthly payments.

– Charges or standard costs added to the balance.

– Taken additional borrowing part way through a month and not yet paid the interest.

– Had a payment holiday.  

If your balance has increased and you are not within these categories, please urgently contact your mortgage lender to discuss the situation and obtain written clarification, especially if you are meeting the mortgage payment amount or making overpayments. There might be errors in how the interest is added to your mortgage.

Factors attributed to mortgage calculation errors

Some of the main reasons for such errors can be attributed to the following:

• Either the lack of qualified staff hired to provide mortgage advice or the lack of training that the mortgage lender provides to staff for dealing with various scenarios with customers can lead to issues.
• Inaccurate verbal payment figures are provided, and there is no follow-up written communication or agreements.
• Customers might make payments after the interest charging date. If you are on a variable or tracker rate, events can occur and cause automatic recalculation of the interest, leaving less to pay towards the capital each month. For example, an increase in the interest base rate, which is fundamental to how lenders set their interest rates for customers.

Before your mortgage term ends, you should get in touch with your lender at least 6 months or a year before the end of the mortgage term so you can start a dialogue to create a strategy and payment plan for the remaining mortgage. Also might not be too late, if you contact them 3 months before the end of the term. The lender, however, would initiate communication at least 6 months before, as part of the requirements within the FCA Mortgage Conduct of Business Rules (MCBR) Handbook.

The FCA has issued a guideline, Financial Guidance (FG) 13/7, which focuses on dealing fairly with interest-only mortgage customers who may be at risk of being unable to repay their loans after consultation with lenders and financial experts. This guideline addresses concerns that arise when mortgages mature, and customers do not have enough capital to repay the balance due.

According to FG 13/7, once the mortgage has reached maturity without the capital being repaid, the Terms and Conditions (T&Cs) of the mortgage will continue until the loan is repaid. This means that the borrower will still be considered a customer of the firm and must be treated fairly under Principle 6.

The guideline emphasizes the importance of discussing various options with the customer and providing them with choices to consider, such as:

• switching the mortgage to a full or part capital-repayment basis.
• extending the mortgage term incorporating a switch to a full or part capital- repayment basis.
• extending the mortgage term to provide more time to repay the capital outstanding or to sell the property.
• accepting overpayments to reduce the end-of-term balance.
• combining part redemption and any of the above.
• extending the mortgage term on an interest-only basis.
• combining any of the above.

Demonstrate meeting lending criterias

Most lenders could consider lending outside standard criteria when the customer’s personal and financial situation affects the payment method. For example, if the mortgage has matured and the lender’s post-maturity policy does not allow extending beyond a certain state pension age, the customer would fail affordability for additional mortgage terms up to 5 years. This is called a Policy Exception, where the customer has done the following:

• Demonstrated the ability to make higher payments over a certain number of months as agreed with the lender. This could be up to 3-6 months. After confirming with the lender, determine whether an agreement for a new mortgage term can be put in place based on the demonstration of meeting affordability for the set period.

Forbearance

The act of forbearance occurs when a mortgage is due to mature, and financial or medical circumstances have affected the customer’s ability to sell the property to repay the mortgage or make an increase in the monthly payments. This situation also arises when the customer is a full-time caregiver for someone due to poor health, leading to negative equity in the property. In such cases, the lender can implement modified lending criteria based on these circumstances and reach an agreement with the customer to extend the mortgage term for a set number of years with affordable monthly payments. This approach is taken to prevent further harm to the customer, who would otherwise have to sell the property and move out while undergoing such challenging circumstances.

Early Engagement

Corresponding with the lender at least 5 or 10 years before the mortgage matures is essential through early engagement because the full amount would not be repaid at the end of the current term. This is where discussions with the lender regarding converting or changing the mortgage to combined full or part capital and interest monthly payments come into play. Additional criteria might include engaging with the lender at least 20 years before you reach the state pension age at the time. This is important because it allows you to confirm to the lender that you will continue to work until that age to make the monthly mortgage payments. Therefore, reaching an agreement for the mortgage to be on a new term for up to 20 years is crucial.

Early engagement can provide confidence to the lender that a customer has tried to raise concerns about the full payment not being completed at the end of the term. It also shows that they are initiating discussions to implement a strategy that is affordable and fits within the lender’s requirements for the best interest of the customer.

Other Useful Support

• Citizen Advice.
• Money Helper.
• Money Saving Expert Remortgage

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