FCA urges action on ‘ticking time bomb’ interest-only mortgages

Written by Adam Cadle
31/01/2018

Nearly one in five mortgage customers have an interest-only mortgage and the FCA is concerned that shortfalls in repayment plans could lead to people losing their homes.
People with interest-only mortgages are being urged to contact their lender after the FCA found that many have still not talked to their lender about their repayment options.

As part of its thematic review into the fair treatment of existing interest-only mortgage customers the FCA found that, although mortgage lenders are writing to customers prior to their mortgage maturing, engagement rates with firms are low.
The FCA review covered 10 lenders who represent around 60% of the interest-only residential mortgage market and looked at how lenders are treating these customers to help ensure their mortgages are repaid at maturity.

Executive director of supervision – retail & authorisations Jonathan Davidson, said: “Since 2013 good progress has been made in reducing the number of people with interest-only mortgages. However, we are very concerned that a significant number of interest-only customers may not be able to repay the capital at the end of the mortgage and be at risk of losing their homes.

“We know that many customers remain reluctant to contact their lender to discuss their interest-only mortgage for a variety of reasons. We are very clear that people should talk to their lender as early as possible as this will give them more options when it comes to the next steps they can take.

“We are encouraged to see that lenders have taken positive steps to engage with and help their interest-only customers. However, as the number of maturities start to increase towards 2032, it is important that lenders take time to review and, where possible, improve, their own strategies.”

There are currently 1.67 million full interest-only and part capital repayment mortgage accounts outstanding in the UK. They represent 17.6% of all outstanding mortgage accounts and over the next few years increasing numbers will require repayment (see notes for editors).

The FCA found that lenders are actively trying to communicate with their customers to understand repayment strategies and to provide appropriate and affordable solutions where needed. However, for most lenders, the engagement is based on writing to customers at specific times before maturity. Where lenders tailored their work to the different customer types identified, they were able to increase contact with those considered higher risk.

The FCA also found that, although lenders were recommending repayment options that appeared appropriate for those customers who made contact and that the harm of repossession due to non-repayment was reduced, the processes which customers had to follow were, on many occasions, challenging. This included delays in getting to speak to advisers, making multiple phone calls and repeating information previously provided.

In 2013 the FCA identified three residential interest-only mortgage maturity peaks. The first peak, happening now, is likely to have more modest shortfalls due to the profile of customers typically being those who are approaching retirement with higher incomes, assets and levels of forecast equity in their property at the end of term. The next two peaks in 2027/2028 and 2032 include less affluent individuals who had higher income multiples at the point of application, greater rates of mortgages converted from repayment to interest-only and lower forecast equity levels; the FCA is concerned that they are more at risk of shortfalls.

Responsible Equity Release managing director Steve Wilkie commented: "Interest-only mortgages are the ticking time bomb that everyone seems to have ignored.

"Originally, interest-only mortgages were taken out with an endowment policy attached to pay off the mortgage debt. But endowments went out of favour and yet interest only mortgages remained popular because of the low monthly payments.
No-one, including the lenders it seems, worried about how the loan was going to be paid back, because house prices were rising.

"Even if prices dip over the next few years, a large percentage of homeowners in their 50s will probably have plenty of equity in the homes, and won't be faced with owing more than their homes are worth at the end of the mortgage term. But herein lies the problem. Most homeowners aren't planning to sell up when their loans expire, so how are they going to pay back these mortgages?. A lot of homeowners may believe, incorrectly, that they'll be able to easily arrange another mortgage - after all they have a large chunk of equity in their properties. Unfortunately, many are in for a nasty shock when they find lenders aren't knocking down their door to lend to them."

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