Money Help Desk: My mortgage has not shrunk despite years of payments

Published on Saturday 9 August 2008 19:19

I TOOK out a mortgage three years ago, and when I studied my latest statement was surprised to discover I had not reduced the debt at all, despite making all my payments on time.

I contacted my bank, to be told this was because it was an interest-only loan. But I was sure I had asked for capital as well as interest to be deducted.

Unfortunately, my original documentation does say interest-only. I think a gremlin I didn't spot must have got in.

What should I do to get back on track, and is it worth complaining about the error?

RW, Fife

Financial adviser and mortgage expert John Postlethwaite, of Punter Southall, Edinburgh, writes:

THERE are two ways to repay a mortgage: either on a capital and interest basis or on an interest-only basis.

With capital and interest (repayment), your monthly payment covers the interest due and also provides a partial capital repayment. This will reduce the amount outstanding over time until it is repaid. With an interest-only mortgage your monthly bill only covers the interest and no capital is repaid.

Interest-only mortgages have the benefit of reduced monthly repayments. They also offer flexibility to repay the loan from another source, such as inheritance, or sale of other assets. However, there is an inherent risk that you are relying on the performance of another asset to repay your loan. This has been highlighted by the endowment crisis of recent years where underperforming policies failed to repay the loan in full.

With escalating property prices and borrowers needing larger loans to get on or up the property ladder, many people have taken interest-only loans with the view to changing them to the alternative repayment mortgage once their income has increased sufficiently to support it.

In your position you have benefited from lower monthly repayments than if you had commenced on a repayment loan, but no capital has been repaid. If it was your original instruction that you wished the advance to be on a repayment basis and not interest-only, I would certainly complain and ask for copies of your original file and instructions from the bank, if you do not have them at home, as although you may not have noticed the error until now, the bank should still compensate you if an error has been made.

In terms of getting the repayments back on track you should get the loan converted to a capital and interest mortgage as soon as possible. This will mean an increase in monthly costs.

Do insurers need a police report?

I HAVE just returned from holiday after losing my camera. I think it might have been stolen. But when I contacted my travel insurer, it said I could not claim as I had not made a theft report to the police at the resort. Is this true?

JM, Edinburgh

Head of insurance at the AA, Ian Crowder, writes:

TRAVEL insurance policies usually stipulate the theft must be reported to the police and a written report obtained. Information on this is in your policy's "How to claim" section. As a general guideline:

&#149 Report all thefts or losses to the police within 24 hours of discovery and ask them for a written police report.

&#149 Report any theft or losses to your courier or hotel/apartment manager, if appropriate, and obtain a written report.

&#149 Keep all your receipts and account for all expenses.

While you could certainly appeal to your insurer, sadly I think it is unlikely that the claim will succeed.

If you have cover for 'personal property outside the home' on your home contents insurance, you could try that route although given that you have now had the claim refused it is unlikely that your home insurer will pick it up.