The latest in our FAQ series concerns a girlfriend who is worried that her partner is in over his head over an interest-only mortgage.
Q: Two and a half years ago, my boyfriend bought a flat using an interest-only mortgage. However, he could only really afford the house because he was consistently getting good bonuses at work. A year into his mortgage, the bonuses started drying up and since then he’s been overspending and using credit card debts to pay for his mortgage costs.
However, because there’s not enough money coming in he has missed two credit card payments. He’s reassured me that his situation will change in six months when his fixed rate deal expires and he can increase his interest-only mortgage and pay off his debts.
Am I worrying over nothing?
A: No you are not. I think your boyfriend may have underestimated how much the mortgage market has changed over the last year or two. The criteria that must be fulfilled to get a loan is now much stricter.
For instance, a good credit score is absolutely key if you want to enjoy a competitive interest rate on your mortgage. What’s more, a bad one might prevent you from getting a new one altogether.
Your boyfriend must understand that because he’s missed some payments on his credit card, his credit score may well have been affected. As a result, it will probably be difficult for him to get a new mortgage from his current provider or a new one.
Does it make sense to increase a mortgage to pay off debts?
I also note that he’s looking to pay his debts by increasing the mortgage, but in my opinion that probably wouldn’t be feasible. The advantage of an interest-only mortgage is that it allows you to pay a smaller mandatory monthly contribution and decide yourself when to pay off the actual capital.
However, it’s just as financially binding as a regular mortgage and nowadays, most interest-only mortgages work with the borrower signing a form that declares how they will repay the capital once the mortgage has concluded.
Going forward, your partner needs to understand that getting a mortgage isn’t as easy as it used to be. As a result, he needs to look after his credit score. If he can commit to not missing any more payments over the next six and 12 months, he will stand a better chance of getting a new mortgage that better suits his situation.
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by Tristan Lewis