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Money+Made+Clear+Guide+ +Mortgage+Shortfall

  1. 1. May 2009 No selling. Our guides – here to help you This guide is part of our Buying a home series. No jargon. No selling. No selling. No selling. No selling. No selling. No selling. Just the facts No jargon. No jargon. No jargon. No jargon. No jargon. No jargon. About the Pensions andEveryday Saving and If things Buying a Financial retirement. money. investing. go wrong. home. home. Services Authority. from the Financial Services Authority (FSA)from the Financial Services Authority (FSA) from the Financial Services Authority (FSA)from the Financial Services Authority (FSA) from the Financial Services Authority (FSA) from the Financial Services Authority (FSA) about dealing with your Available from our helpline or website No selling. No jargon. Just the facts. © The Financial Services Authority, May 2009. FSA ref: COMS0006bH mortgage shortfall. If you would like this guide in Braille, large print or audio format, please call our Moneymadeclear helpline on 0300 500 5000 or Typetalk on 1800 1 0300 500 5000. (Calls should cost no more than 01 or 02 UK-wide calls, and are included in inclusive mobile and landline minutes.) To help us maintain and improve our service, we may record or monitor calls. from the Financial Services Authority (FSA)
  2. 2. With our range of guides, we cut out the jargon and give you just the This guide is facts about financial products and services, helping you to make an informed decision. for you if Just the facts You are Contents about dealing using an investment, savings or pension plan to pay off How interest-only mortgages work 2 with your your interest-only mortgage. Are you on track to pay 3 mortgage shortfall. It’s about: off your mortgage? • why you need to regularly review your investment, Making up a shortfall 4 We try to ensure that the information in this guide, some of which comes from savings or pension plan; and sources outside the FSA, is correct at the time of print. It is possible that some of it is oversimplified, or may become inaccurate over time, for example because of • what to do if you think it Your questions answered 10 changes in the law. You should check the current position before you take any action. won’t pay out enough to pay off your mortgage. This is general information to help you make financial decisions. It is not advice, and cannot take account of your individual circumstances. When making decisions about It also answers some of the Next steps 12 your own circumstances you should consider whether to consult a financial or other questions you may have. professional adviser. Jargon buster 14 Useful contacts 16 1
  3. 3. How interest-only Are you on track to mortgages work pay off your mortgage? With an interest-only The investment, savings or pension Endowment policy fund in cash to help you pay off your mortgage, your monthly plan will need to grow to give you mortgage (up to 25% under current tax If you are using an endowment policy enough money to pay off the mortgage law, which may change in the future). payments pay only the to pay off your mortgage, you should at the end of the term. If it doesn’t, interest charges but not have received regular letters telling you you’ll be left owing money. This is the mortgage itself. You whether your policy is on track to repay What to do if you’re not sure known as a shortfall. it. These are called ‘reprojection letters’. will be expected to make If you think you may have a shortfall, Contact your provider if you’re not They will be marked ‘red’ if there is arrangements to pay off you should consider taking action as a high risk the policy is not on track, sure where you stand on any of your the mortgage at the end soon as possible to ensure you can investment, savings or pension plans. ‘amber’ if there is a significant risk it’s You will need to continue checking the of the term. repay your mortgage – see page 4. not on track, and ‘green’ if it’s currently value until you repay your mortgage. If you don’t think you can avoid a on track to repay your mortgage. If you haven’t already made shortfall, there are options available to Never just cash in or stop paying Endowment policies are linked arrangements to do this, you should you – see page 10. into your plan without getting to investments such as bonds think carefully about doing so now. professional advice – you could See the Jargon buster on page 14 for and shares, which can vary in Talk to your lender as soon as possible lose out financially. an explanation of some words you may value. Make sure you check each as they may be able to help. reprojection letter, even if the policy come across. You may have decided to pay off the has so far been on track. Key points mortgage by putting money in an investment or savings plan such as an Key points endowment policy, Individual Savings ISA, PEP or personal pension Account (ISA), or Personal Equity Plan If you are using an ISA, PEP or personal • Check your plan regularly to (PEP), or you may decide to use money • Talk to your lender if you pension to pay off your loan, you will make sure it’s on target. from a personal pension. haven’t already arranged how probably need to ask your product • Never just cash in or stop provider to give you an up-to-date you will pay off your loan. paying into your plan without projection of the value of your plan. • Act now if you think you have getting professional advice – Remember that with a personal a shortfall – see page 4. pension you can only take part of your you could lose out financially. 2 3
  4. 4. Making up a shortfall There are different ways Make changes to your The figures mentioned in the example here and on page 10 are for you can try to make up the mortgage illustration only. shortfall – some offer more 1. Ask your lender to switch the certainty than others. projected shortfall to a repayment Example For example, you can: method. Helen is 48 and has an interest-only mortgage of £50,000 linked to an • make changes to your mortgage; 4 Your current projected shortfall will investment. The mortgage has seven years left to run and the interest rate be paid off by the end of the term as • start an extra investment or savings is 5.95%. long as you keep up the payments. plan; and/or She asked her investment provider to give her an up-to-date projection, and 4 It should be fairly cheap and simple • make changes to your existing plan. this told her that her investment may only pay £40,000, a shortfall of £10,000. to arrange. Helen wanted to change £10,000 of her mortgage to a repayment method, We explain these options here and 4 If the projected shortfall grows, you which means her payments will increase from £247.92 to £344.18 a month. have used the following symbols can switch more of your loan to a repayment method. The repayment method will now repay the £10,000 shortfall. When to help you: her interest-only mortgage of £40,000 ends, she will pay it off if the 4 An advantage of this option 8 The repayment method will cost investment pays out the projected £40,000. you more each month, as you are ? Check this out before you paying back both the interest and If Helen could not afford the £344.18 a month, she could have asked her decide the capital. lender if it was possible to extend the term of the £10,000 repayment 8 Take care – there is a drawback mortgage. Although this would mean that she would pay less each month, to this option she would have to pay more in total. Think about the pros and cons of each option, and if you’re not sure which one is right for you, get professional advice – see Useful contacts. 4 5
  5. 5. Making up a shortfall 2. Ask your lender to convert your If you want to convert your whole 3. Repay part of your mortgage early Start an extra investment or whole mortgage to a repayment mortgage to a repayment method by paying off a lump sum or by savings plan method. but are worried that you might not be overpaying each month. able to afford higher payments talk to 1. Use a cash savings account or a 4 Your mortgage will be paid off at 4 This will reduce what you owe and cash ISA. the end of the term as long as you your lender. what you need your investment, keep up the payments. The increase in payments may not savings or pension plan to cover. 4 The amount you get back does be as much as you think, and your not depend on the performance of 4 The longer your mortgage has to 4 It may end up being cheaper than the stockmarket. run, the smaller the increase in lender may be able to come up with a saving separately to pay off the your monthly repayments will be. plan that can help you. shortfall in the future. 4 It may be a good option for the For example, a repayment mortgage short term – for example if you have ? If you can afford it, and if your plan ? Check whether your lender will to delay paying off a lump sum is doing well, you could continue of £50,000 and an interest rate of make an early-repayment charge. 6.29% with 15 years to run will cost from your mortgage because of with it just for saving. Some ? Check when your lender will early-repayment charges, or your investment products include useful you £429.80 a month. give you the benefit from extra mortgage is near the end of its term. insurance cover. You may also be able to extend the payments – some do so only once term of your repayment mortgage – a 4 Taxpayers can avoid paying tax on 8 If you cash in your investment a year. their interest by saving in a cash you could lose out financially, and mortgage of £50,000 with 20 years to run and an interest rate of 6.29% Making these changes to your ISA. You can pay in £3,600 in you may need to arrange other mortgage is probably the lowest- 2009/10, going up to £5,100 on insurance cover. So make sure you would be £366.63 a month. risk way of making up a shortfall. 6 October 2009 if you’re 50 or over. get advice first if you’re unsure. This would limit the increase in the Ask your lender if there will be any The £5,100 limit applies to 8 The repayment method will cost monthly payments, though it does charges for this, and how much everybody from 6 April 2010. you more each month, as you are mean that you would pay back more they will be. in total over the mortgage term. 8 Cash products may not grow paying back both the interest and 4. Extend the term of your interest- sufficiently over the longer term to the capital. Think very carefully about extending only mortgage and investment or meet the shortfall. the term into your retirement, unless savings plan. See Make changes you’re sure you can afford it. In the longer term, other options to your existing plan on page 8. (such as overpaying your mortgage payments) are likely to be better value for money. 6 7
  6. 6. Making up a shortfall 2. Use a stocks and shares ISA. Make changes to your 2. Top up your plan by paying in Key points 4 Potentially a good way of saving existing plan more each month. over the longer term. Historically, 1. Extend the term of your plan. ? You should ask your product stocks and shares have grown provider if you can do this and, if so, • There are pros and cons more than cash savings accounts ? You may be able to rearrange your whether there are any charges. which have interest added. You can plan over a longer term. You will first for each option – you must need to ask your provider if this is ? You may also face tax liabilities, so decide which is the right one pay in £7,200 in 2009/10, going you may want to get professional up to £10,200 on 6 October 2009 if possible. If so, ask your lender to for you. extend the mortgage term to match. advice first. you’re 50 or over. The £10,200 limit • Talk to a financial adviser if applies to everybody from 4 This means you could make more 8 Your plan is still linked to the 6 April 2010. payments into your policy if you stockmarket, so there’s no you are thinking of cashing in can’t afford to increase how much guarantee you’ll reach your target or stopping any financial plan ? This is currently a tax-efficient way amount. of saving. you pay each month. – otherwise you could lose ? You may face extra charges 8 You could be worse off than if you out financially. 8 This product is linked to the used the same monthly payments stockmarket, and the value of your and a tax liability if you vary an endowment policy, so it’s a good to reduce your mortgage. investment could go down as well idea to get professional advice first. as up. So there’s no guarantee 8 Under a personal pension, you can only take part of your increased No selling. your investment will grow enough 8 The growth of your investment or to make up your shortfall. savings plan is still linked to the savings in cash. You can’t take No jargon. stockmarket, so there’s no guarantee anything before you are 50 (rising Just the facts 8 This product is meant for investing to 55 by 2010). over the long term, and may not it will reach its target amount. about dealing be suitable if you only have a short 8 Not a good idea if it means taking If you want to make changes to your with your plan, you should talk to your product time to build up a lump sum. your mortgage into retirement, mortgage unless you’re sure you can afford it. provider or financial adviser. If you decide to start an investment shortfall. or savings plan to make up a 8 The longer the mortgage term, the shortfall, it’s a good idea to get more interest you’ll end up paying financial advice. in total. 8 9
  7. 7. Your questions Question I’m about to retire and my Get our Equity release schemes – answered payment plan isn’t going raising money from your home guide – see Useful contacts. You should to be enough to pay off my also think about seeking professional mortgage. What can I do? advice – see Useful contacts. Answer Pay off what you can, then talk to Question Question your lender. Often, once you reach • You could sell your property to repay retirement it’s harder to keep up the the mortgage, and buy a cheaper I want to complain about my repayments as your income is usually What can I do if the mortgage property so you don’t need a mortgage. much lower. mortgage endowment policy. term is ending and I can’t You could sell your property to repay the What should I do? avoid a shortfall? In general, provided you keep up the mortgage, and buy a cheaper property new agreed mortgage payments, you so you don’t need a mortgage. Answer Answer should not lose your home as a result of the shortfall. Alternatively, you could consider If you think you have grounds for When your investment pays out at the a home reversion plan or lifetime complaint about how you were sold end of the term, pay all the money into Example mortgage. These are both types your endowment policy but haven’t your mortgage to find out exactly how Joe has come to the end of his of equity release schemes, either yet made a complaint, do it now – much you still owe the lender. Then talk mortgage term and is left owing his where you: time may be running out. Get our to your lender as soon as possible. mortgage lender £8,000. Endowment mortgage complaints • sell all or part of your home in return You may have several options: The interest rate on his mortgage for regular income, a cash lump sum guide – see Useful contacts. But is 5.95%. Joe could carry on with or both, and continue to live in your remember, having a potential shortfall • You could pay the shortfall from his current monthly payment of home for as long as you wish; or doesn’t always mean you were mis- savings you have elsewhere. £154.48. This would repay the sold your endowment policy. • You could discuss a new repayment • secure a loan on your home, which remaining capital and interest in is repaid by selling your home when If you do get compensation from period. The quickest way may five years, and would cost £9,268 you die or go into long-term care. making a complaint about the way you be to carry on with your previous in total, but this is more than Joe were sold your endowment policy, you monthly payment, although you may You should think very carefully about wants to pay every month. should think about using it to reduce the be able to agree lower payments equity release, as there are risks as Joe will retire in seven years, so he amount you owe on your mortgage. over a longer time. You should well as benefits. For example, they avoid extending the term into your has agreed with his lender that he will can be expensive and inflexible if your retirement unless you’re sure you repay the £8,000 over seven years circumstances change in the future, can afford it. and his monthly payment will be and they may affect your current or £116.68, which will cost him £9,801 future entitlement to State benefits. in total. 10 11
  8. 8. Next If things steps go wrong Step 1 Step 3 Complaints Compensation If you have a complaint about the If a regulated firm is unable or likely to Think about how you will pay off your If you think you may have a shortfall, advice you received when you bought be unable to pay claims against it, you mortgage at the end of its term. If do something about it as soon as your savings, investment or pension may be able to get compensation from you haven’t already arranged a way possible to make sure you can repay plan, or when you took out your the Financial Services Compensation to repay it, talk to your lender or a your mortgage. interest-only mortgage, you should Scheme. This will be subject to a financial adviser as soon as possible. first contact the firm you dealt with. number of conditions and exclusions. They have a procedure to follow when There are limits to the amount of dealing with complaints. compensation it can pay depending Step 2 Step 4 on the type of claim. If you’re not satisfied with their response, you may be able to take The service is free to claimants – see Regularly review any savings, If you can’t avoid a shortfall, talk to your your complaint to the Financial Useful contacts. investment or pension plans you have lender. There are several options open Ombudsman Service. to see if they are on track to repay to you. The firm should give you the details of your mortgage. this free service – see Useful contacts. For more information get a copy of our Making a complaint guide – see Useful contacts. Remember, a mortgage is a loan secured on your home. This means the lender can sell your home to get their money back if you cannot repay the loan. 12 13
  9. 9. Jargon buster Some key words and phrases explained. Annual statement Individual Savings Account Mortgage Product provider A statement your mortgage lender (ISA) A loan secured on your property. The company you take out an sends you each year showing, among A tax-efficient way of saving or If you don’t keep up the mortgage investment or savings plan with. other things, what you’ve paid and investing, with limits on how much you repayments, your home may be what you still owe. can pay in each tax year. repossessed. Repayment mortgage A mortgage in which you pay off the Early-repayment charge Interest Mortgage lender loan amount (capital) and interest at A charge you may have to pay if you The charge that lenders make when The company you take out your the same time. pay back a mortgage early (including if you borrow their money. mortgage with. you move to another lender). Reprojection letters Interest-only mortgage Pension-linked mortgage Regular letters you should receive if Endowment policy A mortgage in which you pay only An interest-only mortgage linked to a you have an endowment policy. They An investment plan that you usually the interest charges of the loan each personal pension. You use the tax-free tell you whether or not your policy is pay into each month, which pays a month. You are not reducing the loan cash from your personal pension when on track to repay your mortgage. lump sum when it matures. amount (the capital), and you must you retire to pay off the capital you repay this in some other way at the owe on your house. Shortfall Home reversion end of the term. The money left owing at the end of A type of equity release scheme – Personal equity plan (PEP) the mortgage period (the term). you sell all or part of your home to a Lifetime mortgage A way of holding investments that is scheme provider in return for regular A type of equity release scheme – a sometimes used to pay off a mortgage. Term income or a cash lump sum or both, loan secured on your home, which is You cannot get a new PEP now. All The length of your mortgage, normally and continue to live in your home for repaid by selling your home when you PEPs automatically became stocks and stated in years. as long as you wish. die or go into long-term care. shares ISAs from 6 April 2008. 14 15
  10. 10. Useful Debt Advice Network Complaints and compensation 0300 011 2340 Financial Ombudsman Service South Quay Plaza contacts 183 Marsh Wall National Debtline London E14 9SR 0808 808 4000 0845 080 1800 Finding a financial adviser Financial Services Compensation Scheme (FSCS) Financial Services Authority (FSA) IFA Promotion 7th Floor, Lloyds Chambers On our website Portsoken Street To order other you can find guides, check our Register, report For mortgage brokers or independent London E1 8BN • a Mortgage calculator to help you misleading financial adverts or financial advisers in your area. 020 7892 7300 find out how much your monthly other promotions, or for general mortgage repayments are likely to be. information or guidance Personal Finance Society • a Budget calculator to help you Helpline: 0300 500 5000 work out your spending. Typetalk: 1800 1 0300 500 5000 For financial advisers in your area. • Compare products tables to (Calls should cost no more than 01 or 02 UK-wide calls, and are included in inclusive compare mortgages and savings mobile and landline minutes.) accounts. Institute of Financial Planning Other guides Call rates may vary – check with For help in planning your finances. your telephone provider. • Endowment mortgage complaints Money advice agencies • Equity release schemes – raising MyLocalAdviser money from your home Consumer Credit Counselling Service (CCCS) • Getting financial advice For a mortgage, insurance or Wade House • Making a complaint investment adviser in your area. Merrion Centre • What to do when you can’t pay Leeds LS2 8NG your mortgage Main helpline – For more titles, call us or go online 0800 138 1111 Mortgage arrears helpline – 0800 975 9558 16 17