A recent report by the Financial Conduct Authority (FCA) warned of the risks of interest only mortgages and the possibility for thousands who are unable to repay their loans losing their homes.
The FCA found that many borrowers had not talked to their lender about their repayment options and people with interest-only mortgages are being urged to contact their lender.
The FCA report said, “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. 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.
Jonathan Davidson, Executive Director of Supervision – Retail & Authorisations, 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 1.67m 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.
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.