Changing to interest only mortgage

Hi

Would appreciate advise from anyone who has recently changed to interest only mortgage to cope with the mortgage repayments.

We're converting from repayment to interest only for 12 months and the bank has raised the interest rate to 3.5% for the duration + we have to take out their life insurances.  However, on renewal they are fixing the interest rate to Euribor + 2.5% (not the renewal benchmark rate which will probably a lot lower) and only if we keep the life insurances...if we don't keep the insurances then the interest rate escalates to Euribor + 3.5%.

The bank seems to have us by the 'short and curlies' as even though have agrred to 'help us out'...they have got us in a mortgage trap regarding the interest rate on renewal. :(

Has anyone else experienced this on changing to an interest only mortgage....it would make me feel a whole lot better to think we're not the only ones!

 Hi Chrysee

Yes I know lots of cases like this, you are definitely not the only ones!! The banks will take advantage anyway they can when they find you in this situation especially with insurances and interest rates.However, only life insurance sometimes. I imagine it would only be to cover the value of the mortgage. There would be no other reason for them to demand that. I would also imagine that you could negotiate with them that you have your life insurance where ever you choose to have it and put them as beneficiaries of a certain amount up to the value of the mortgage. This was once offered to my sister in law when she did the same thing a couple of years back. However it depends very much on the bank. I believe it is illegal for them to force you to take out an insurance policy with them, but you do have to prove you have one, especially in case of fire or anything else, for a minimum of the "catastral value" to protect the property. But the banks do what they want. Be very careful with the return interest rate. I don't know how much you have now but it can have large impact on the return to 'capital and interest'. Look at it very carefully.

A friend of mine was on  euribor+0,75 before going interest only and on return it would have been euribor+2% if that is any help or guidance. That was offered 8 months ago more or less. Another friend of mine did the same thing and when he returned couldn't pay the increased mortgage amount and they renewed his non interest period for another year, when he returned from that one he still couldn't pay the increased amount and they ended up reducing his interst rate and pardoning part of the debt to keep the payments within his possibilities, anything so he wouldn't stop paying! 

Hi Ian

Many thanks for your reply.  It does make me feel 'slightly' better to know that other people are in a similar situation.  Our current rate for our repayment mortgage is 2.27% (incl. euribor).  Re. life insurance...we had this same problem with the bank when we first took the mortgage out with them. Even though we had exisiting policies in force with another insurance provider and provided them with the evidence the bank didn't want to know.  They insisted we have their policy in force for at least 1 year....which they said was a condition of the mortgage (which we only found out a day before the signing at the notary!)  After the first year elapsed they still dug their heels and said we could not cancel the life policies...another year later they allowed us to cancel it!  So we're back to square one again, with them insisting we take out unneeded life insurances to obtain an interest only for 12 months...and once again tied to the policies on renewal for gaining a better rate!  We're towing the line with them as we really need to convert to interest only and don't want them to retract their offer of 'help'.

We have our property on the market at the moment so hope to sell it before the 12 month period.  The crunch will come at the end of that period if we haven't been able to sell...until then I suppose we will just have to "bite the bullet"!

The bank has you over a barrel unfortunately Chrysee - with Euribor so low they are making little money on mortgages - most lenders now are charging a minimum of 3.5% above EURIBOR for new loans to non residents - hard to blame them really because they can get 8% plus from lending to the Greek Govt in tranches of 500m Euros and guaranteed by the EU so easier to administer and if they let Greece go bust then we are all snafud .... as to the life cover they will simply say if you want the interest only you have to take the life cover ..... just be mindful its a quick fix and you need to do the calculations as to what payments will be by comparison with now when you revert to repayment on the new rate - if youre paying 2.27% your chargeable rate will very nearly double (assuming rates stay the same) .... if you are in the early days of the mortgage this could mean double the monthly payment ..... do your sums thoroughly 

You want to be very careful with that deal, hope i am WRONG but dealings with banks are all one sided, their side, the bank might. and i only stress MIGHT want all the money bank when the 12 months are over stating that  interest only loans are always fully payable when the agreement ends after the set period.

I have two experiences with banks over the years, last one two years ago and nothing like what you are doing, but they did on both counts think they were going to win that i am sure of, but with banks never the less,  i won on both accounts, just remember banks are telling staff to get the deals going, providing we win, and also they are like politicians...

...It's not what they tell you that counts..It's what they don't tell you that counts.

It is neither what they tell you nor dont tell you that counts ..... t is what is in writing that counts - I am not sure if you will have to go to Notary to sign a new mortgage agreement but make sure you have a full translation of any documents that you sign

All very well Smiley but i have never met a person yet that read the small print on anything let alone an important document like a house loan,  suppose those that have are out their somewhere, the interest only loan to this person might just be the life line they need, and sitting in whoever's office on the day probably knowing that if they don't sign they are in big trouble is enough to make them sign whatever the outcome, try telling someone this deal is not for you when they are border line, the best answer you might get is "I have no choice, i have to sign"

Agree fully with you, get a translator for both things, the spoken word and documents. But Chrysee, still be double careful with an interest only loan, they can suck.

Thank you all for your sound advice, it is much appreciated!

Changing to an interest only mortgage is our only lfe line at the moment.  We're off to the Notary thisThursday to sign the documents.  All this was arranged via email correspondance without even setting foot inside the bank and we're meeting the bank representative at the Notary. 

One question though Baz.....what do mean when you say the banks might want ALL the money back once the 12 month period has elapsed?  Do you mean they will want the deficit of the repayment balance to be paid after 12 months? 

I believe what he is saying is that at the end of the Carencia (interest only) period the bank MIGHT demand the entire debt back ...... I have to say that I have never experienced anything like this in my time doing mortgages in Spain. And to be honest I think it would break all the consumer regulations here as an unfair clause if it did exist and you were maintaining payments. In addition the last thing the banks need on their books at the moment is another property that they cannot sell.

Nevertheless ensure that your lawyer provides you with a thorough translation of any new documents or Mortgage Deed that you are required to sign.

Chrysee.

In answer to your question, please remember that i don't know the full facts of the conditions that you are taking the loan out so what i say is pure speculation on my part.

Give you an instance as to whats happening here in the UK with these interest only loans right now, you probably know this and plenty were sold on this very same basis, Half the folk who sold these loans didn't give a stuff how the borrower fared after the loan period was up, they got their commission and had left that job for another one by then anyway.

Go back lets say about ten years or so, some folk never had the means to get a regular mortgage repayment over twenty five years and then it finished, so they were sold an interest only loan, you know what that is, you never pay any money off the capital so what you borrowed ten years ago, you always owed that full amount, the only difference in many cases was the monthly payment was a lot lower, and the folk got the house they wanted, they jogged along paying this interest for ten years, then all of a sudden the lender said "Right times up, pay the loan back in full".  In many cases the folk never had the full amount of money saved to pay back the full amount of the loan.

Now your case sounds like you are converting your existing mortgage to an interest only loan, could it be that you are taking out a fresh / new loan on a house you already own, their by of a sorts selling it back to the, lets say original lending bank, the bank then gives you a one year interest only loan, with the full amount borrowed to be paid back in full after the twelve months, that you want to be fully aware of and do your research,  the next scenario is that the bank is afraid that you cant pay now and will stop paying so they are helping you out, sorry but i don't know to many banks that care that much.

It's got nothing to do with maintaining monthly payments as all loans have some sort of time frame when to be paid back, and yours could be after the twelve months period is up.

As i say none of this could be what your doing, but jumping out of the frying pan into the fire is being done all to often these days.

yes

baz speaks much sense here and you should probably listen to him and do more investigation or your lawyer (is you have one which i assume you do) should do more research into the terms and conditions of this loan.

Hi Baz you speak a lot about what has happened in the UK - can I ask, have you ever seen a Spanish Mortgage Deed? They are generally about 40 to 50 pages long with every element of what happens in the event of default, penalty interest charges and an overall term of the loan etc.

When one arranges a modification to the original loan (such as an amendment to interest only for 12 months) it is usually added as a codicil to the original deed. Interest only is an alien concept to the Spanish and only started to be offered here in periods longer than 2 years when the influx of UK branded lenders appeared in Spain to hang on to the coat tails. By 2008 the max period interest only being offered was 15 years - with the collapse of HBOS and the closure of their Spanish business this was quickly withdrawn. If a new mortgage is written in Spain as per your example below then the costs will run to 5% of the size of the mortgage as taxes Notary fees etc all have to be paid again (its why there is no remortgage market in Spain). And I am sorry to disagree Baz but as long as one is maintaining the terms of the mortgage deed here lenders are not permitted to impose unfair conditions - its a statute in law.

Of course if one is not maintaining payments (one of the conditions) then a lender is entitled to possess the property - however it is not in their interests (especially given the current climate as they already have so much toxic debt on their books). The repo process here is way more complex than the UK and as the Bank of Spain is lender of last resort for ALL Spanish mortgages the property becomes thr property of the Courts to sell through a blind auction process (Subasta) - not the bank itself. If the subastas cannot find a buyer it usually takes two to three years of Court administration before it finally passes back to the bank to sell it for whatever they can get. So you can imagine the last thing they want is to take a property into possession with a bad debt on its books.

It should be said that in every circumstance Chrysee should retain the services of a good quality lawyer (one does not have to be qualified in Spain to practise law) to ensure he/she is getting a thorough translation of any amendments to terms of the mortgage. It is an additional expense but peace of mind is paramount. 

The main thing I was concerned about was that the bank would demand the mortgage be paid in full after the 12 month period is over.  However, the bank has confirmed (in writing via email) that the mortgage will revert to repayment with an interest rate of 2.5% + euribor for the remaining term providing we keep the life insurances.  If we don't keep the life insurance the interest rate will be 3.5% + euribor.  There is no clause in the modification which states that the bank will demand full repayment of the mortgage after the 12 months.  

In Spain Chrysee it would have been highly unlikely there would have been.I would still have my lawyer confirm any new mortgage deed or codecil that you have to sign at Notary as that is the document that will count - the one recorded at the Land Registry - just so you know if there are other terms you are not aware of.

Smiley.

In answer to your question, nope i have never seen a Spanish mortgage deed, only ever had the deeds on the house's i have bought in Spain.

I never mentioned maintaining payments, i did mention that for Chrysee's sake they make sure that the original 1st loan is not changed into a twelve month interest only loan which then might or could become payable in full at the end of the term ie: twelve months, as we now know this is not the case.

I am also fully aware that while the borrower is maintaining regular payments the lender cannot IMPOSE unfair conditions on them, any and all payment conditions would have been included into the new agreement, even in the UK no lender can impose unfair conditions if you are keeping up with regular payments, they can only act on the conditions within the agreement. Unless of course???

Chrysee, You have mentioned that you haven't even put a foot into the bank, and the only time you will meet the bank rep is at the Notary's Office, isn't that a bit late should you find something you cant agree with,  is this also standard practise in Spain? sorry if i have sounded a bit course in answering you but with everything i have done in my business's i have wanted to know the In's and out 's of a ducks backside.

Be carefull when someone tells you this is best for you.

Sorry Baz I thought you said - I must have misinterpreted your meaning

It's got nothing to do with maintaining monthly payments as all loans have some sort of time frame when to be paid back, and yours could be after the twelve months period is up.

The point I am trying to make is that if Chrysee is abiding by the terms of the Mortgage Deed then the bank has no rights to possess/take back the property and in the current climate even less interest in doing so. In Spain they are not permitted to change the loan to a 12 month interest only loan. 

For what its worth my personal view is that if Chrysee cannot sell the property now at the price its being marketed at then it is unlikely that situation will have changed for the better in 12 months. Confidence is very low generally in Spain and mortgage lenders are motivated more to decline applications than accept them - of course the fact they can get 7% plus by lending to the Greek Govt underwritten by the EU doesnt help matters and if they hadnt been INSTRUCTED by the Bank of Spain in conjunction with the Govt to support the residential mortgage market they would have stopped lending altogether for new purchases.

No problems Smiley.

One thing though, Chrysee has said the bank is doing this, and willing to convert the interest only loan back to a normal mortgage after twelve months, yet you are saying they are not allowed to????  I am not doubting you for one moment as this is your work, but  am i missing something here? i guess i must be.

NO baz that is not what I am saying - you have misinterpreted

The bank is permitted to vary the terms of the loan by offering a period of what is known as CARENCIA (interest only) at the end of that period it will revert to repayment for the remaining term of the existing loan. Thus if he has 20 years left to redeem the loan today in one years time he will have 19 years remaining. Payments would increase obviously not only because it is back to repayment but he also only has 19 years to repay the principal instead of the 20 today. In addition he needs to factor in that the chargeable interest rate he is paying today has been changed to an increased margin above Euribor. 

it may sound as if what baz is saying is a bit pie in the sky and may never happen or you need not worry about it.

but if you are dealing wirh a spanish bank you need to be prepared for anything

and i mean anything

Baz....Verbal communication cannot be recorded and can be denied (as we have found to our detriment in the past).

Our communication with the bank has been done via emails deliberately so we have everything recorded in writing from them. We have spoken to our account manager several times on the telephone but always followed up with an email to verify the details discussed.   The procedure to change to an interest only mortgage started in November 2012, so it has not been a 'quick' decision for the bank to allow us to convert.  We really could not sleep at night with worry waiting for them to make the decision to allow us to convert.

As our situation stands (and also considering we have no other option), switching to a temporary interest only mortgage will prevent the bank from repossessing our property.  It really is a 'no brainer situation' for us, especially as our property is not in negative equity. 

The most important details of the modification of the mortgage has been verified.

1. The interest rate change during the 12 month period.
2. The interest rate after the 12 months is over.
3. The bank will not demand full payment of the loan after the 12 month period (providing monthly payments are up to date)
4. The mortgage will convert to repayment for the remaining term of the loan.
5. We have to take their life insurance as a condition of the modification.