Interest Only - Pros & Cons...

[inarrears]

Hi,

I'm wondering what are the pros and cons on paying interest only.

About a year and a half ago I found myself in €20K of arrears. I now have this down to €14.5K.

My bank has recently called me and offered me 6 months (initially) to go Interest Only. I know this will help clear my arrears faster but are there any pitfalls I should be aware of? I know I will have a larger repayment afterwards. I'm not worried about that as I'm making a hefty overpayment as it is.

My main concern would be that this is a ploy to get me off my tracker mortgage.

 

[Brendan Burgess]

My main concern would be that this is a ploy to get me off my tracker mortgage.

No, it's not a ploy to do that. They are not allowed to switch you off a cheap tracker.

Oddly enough, some lenders are trying to get their borrowers onto sustainable mortgage repayment plans. Which lender is it? Ulster Bank is particularly proactive.

It is unusualy that they would put you onto interest-only if you are currently able to pay the full repayment plus part of the arrears.

There are currently three parts to your repayment:
1) The interest
2) The scheduled capital element of the repayment
3) The bit off the arrears.

I am guessing that they are saying to you:
Leave the payment amount the same.
By switching to interest only, you won't have to pay off any capital.
The capital you would have paid will go off your arrears.
You will clear your arrears quicker.

This is good for you. This is also good for them as the loan won't be in arrears and so they won't have to provide additional reserves against it.

An alternative approach would be to ask them to "capitalize the arrears". The amount you owe would remain the same but you would no longer be in arrears. Some banks just refuse to do this as it weakens their hand in the event of taking legal action. But if you have been paying more than is due for over two years, they should allow this.

Brendan

 

[inarrears]

Thanks for your reply Brendan.

My lender is ICS. Who I must say have been brilliant to deal with throughout my troubles.

I have been paying my full payment + €250-€350 extra. I just thought it strange that they would call me and offer this. What's in it for them? Is it just that I get back on track sooner?

My interest is about €360/month so if I paid about €1000 a month I would have the arrears paid off in less than 2 years as opposed to another 4.5 years.

I did ask them to capitalise the arrears when I first found out about them but they said it wasn't an option. Not sure if I would want to now as I'm managing the overpayments fine.

I wonder how this would effect my actual repayment afterwards? Though I do intend on keeping the overpayment going for the term of the mortgage.