Can I remortgage without proving I can repay the loan?

22 May 2019

Q

I have an interest-only £200,000 mortgage ending in 14 years. I cashed out the endowment about 10 years ago, so have no insurance to pay the mortgage off when it’s due. That said, I have £150,000 equity in the house, and will probably want to downsize in the future anyway.

I am a self-employed web designer, so can work for ever if I want to and also have an option to move to a lovely place in the country that is owned by my mother-in-law, who is very comfortably off, as are my parents.

I recently contacted my mortgage lender to increase my mortgage by £20,000. Though I don’t have debts and earn enough to pass the criteria, when asked if I have any way to pay back the mortgage, it got a bit awkward.

So my question is: if I tell my lender that I have no means to pay back the debt, would it have the right to stop the mortgage in some way?

I would also like to know if this would also be the case when applying for a fixed-rate mortgage. I’m currently on a 3.7% interest rate, and the lender has a deal on offer of 2.5% for two years fixed.

From
JF/via email

A

Lenders will need to be able to demonstrate that a borrower can afford any new mortgage. That will require an assessment not only of income but also of the borrower’s outgoings and ongoing commitments.

Affordability tests will also consider whether the mortgage is affordable now and will remain so in the future, so lenders will apply a stress-test as well.

When it comes to interest-only lending, the lender will also need to assess the borrower’s repayment strategy to cover the capital. Lenders have tightened their requirements over what they deem an acceptable repayment strategy. The original endowment policy would have been designed to meet those requirements, but other acceptable repayment vehicles could include Isas or a pension if the investment levels are adequate.

The questions about the repayment vehicle are to ensure that borrowers not only understand that they’re not making inroads into their mortgage balance each month, but also to ensure that there is a plausible repayment strategy in place.

You mention that you expect to downsize your property, and some lenders can consider that as a repayment strategy. There is also likely to be limitations to the maximum loan to value [how much mortgage you have in relation to how much your property is worth] and some lenders will have minimum income requirements as well for interest-only lending.

So you should expect to be asked about the repayment vehicle, and lenders will need you to meet their criteria when you are increasing the borrowing or switching to a new lender.

Different lenders will take a different approach, so it’s worth shopping around. If you are switching on a like-for-like basis, your existing lender may be able to offer an option without reassessing the repayment vehicle or affordability.

Of course, it makes sense to consider how you will plan to repay the mortgage in the longer run, to give yourself options rather than potentially face the need to sell at a time when you may prefer not to. Having cashed in your endowment policy, you will no longer have the life cover that it provided, so it is also a good idea to revisit your protection requirements.