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Interest-only mortgages
At the weekend I heard a radio report that the building societies and banks are ending interest only mortgages unless they can establish that the mortgagee has sufficient investment vehicles or something similar in place to repay the capital at the end of the mortgage term.
Yesterday I had a call from a former client who tell me that her bank is in effect foreclosing on her as she doesnt have any way of paying off the capital. She doesn’t have an interest-only mortgage as such but has recieved mortgage interest from IS for several years and is not in arrears with payments of interest. The mortgage appears to be for far less than the value of the house.
I do not have any great experience of housing law and I was wondering whether this action by the bank is in fact lawful.
I was also wondering if anyone else has noticed a something similar happening.
On a similar theme there were some plans floated to put a charge on a property to repay all state mortgage interest payments when the house is sold. As house prices are fairly stable or even going down I think it might be possible that the charge to recover interest paid might mean that there is insufficient equity in a house to pay off the capital sum and this could potentially lead to more foreclosures as the banks try and preserve the money they have lent.
Hi,
Banks and Building Societies have been much more stricter on lending through interest only mortgages for the last few years than they used to be.
You mention that your client doens’t have an interest only mortgage so it must be repayment. I would suggest that there’s more to the story than the client has given you. It is very unlikely that the lender has just called the funds in if she is meeting the repayment side to her mortgage and the DWP are paying the interest.
It could be that she is in arrears or that an informal agreement to pay reduced payments has now come to an end or her fixed rate period has come to an end and they have done a review.
I would suggest that she seeks money advice as there may be something she can do.
I have always been suspicious that the notion of the government creating a legal charge on the property was nothing but a bit of mischief making. A charge on real property is a mechanism which creates a legal right to secure a debt or a right. Charges usually take priority according to date of registration. So first, the government will have to abolish mortgage interest payments in their current form as a statutory right and turn them into a form of government loan or investment. Second, unless the government creates an exception to the priority of registration rules then it is unlikely to get back the debt in many cases as the original mortgagee and, often a second mortgagee, will swallow the entire remaining equity. Local authorities register a charge on properties in deferred debt cases but still have to wait in the queue. The government might take this option otherwise it could be in danger of wading into well settled areas of land law creating havoc along the way. And finally, finance companies may be less willing to give mortgages where the government may be likely to create a charge and take priority.
I have always been suspicious that the notion of the government creating a legal charge on the property was nothing but a bit of mischief making.
I’m afraid not.
This concept came up in the informal SMI consultation that finished in February. It was expressed as a belief in the unfairness of taxpayers money helping to acquire a capital asset at times of rising house prices. The paper says that government saw SMI as a temporary measure during times of crisis such as unemployment or relationship breakdown. Longer term support, for older people and those with disabilities, shouldn’t be expected to be open ended. Not only did they suggest reclaiming SMI, on death or sale, but they proposed charging administrative costs and interest on top. In their example £5,200 interest would become a repayment of £6,000.
They said that they would stop acquiring more of an interest once negative equity was reached but that wouldn’t, presumably, stop lenders adding to the account.
The measure, so the CML website says, was proposed to DWP by the Council of Mortgage Lenders.
I spoke the week before last to a senior housing academic, who is very much ‘in the loop’, and he said that they intend to take this forward. They have to find £10Bn somewhere.
It will be interesting as we can expect to see the Daily Mail and its readers on the streets with this one.
I should have said that it seems likely not to apply to existing claims. Malcolm Whitehouse, the Universal Credit Programme Director, said in a letter to the Work and Pensions Committee in July:
In circumstances where people need long-term help with their mortgages because they are disabled or have retired with outstanding mortgage liabilities, the Government believes that it is not fair to pay SMI indefinitely without recouping some of the cost to taxpayers, through sharing in the asset gain to those individuals made possible by the support from the State. The Government believes that for new claims in the future, in exchange for supporting someone to live in their own home whilst they are on benefit for long periods, the best approach would be to put a charge on their properties to recoup the SMI paid. The Government is still considering this option.
I have always been suspicious that the notion of the government creating a legal charge on the property was nothing but a bit of mischief making. A charge on real property is a mechanism which creates a legal right to secure a debt or a right. Charges usually take priority according to date of registration. So first, the government will have to abolish mortgage interest payments in their current form as a statutory right and turn them into a form of government loan or investment. Second, unless the government creates an exception to the priority of registration rules then it is unlikely to get back the debt in many cases as the original mortgagee and, often a second mortgagee, will swallow the entire remaining equity. Local authorities register a charge on properties in deferred debt cases but still have to wait in the queue. The government might take this option otherwise it could be in danger of wading into well settled areas of land law creating havoc along the way. And finally, finance companies may be less willing to give mortgages where the government may be likely to create a charge and take priority.
I must admit that I hadn’t thought about the priority between creditors. I take the point about abolishing SMI as, in effect, a grant and rejigging it as a loan but I can’t see that it would be particularly difficult to do this.
It will cheer up local authorities when looking to recover some costs of residential care. It will also do wonders for the sale of equity release products - no point in hanging onto the house for the kids or for care if the government will take it first.