The hype engendered by the industry on defaults caused by the ‘ticking time bomb’ of interest-only mortgages has failed to materialise, a thematic review by the Financial Conduct Authority has revealed.
Its long-awaited review into the state of the interest-only mortgage market found that 90 per cent of customers had a repayment strategy in place.
It found that 37 per cent of consumers had a “definite or possible” shortfall based on their own estimates, with the average owing approximately £22,000. The modelled data, carried out for the regulator by research company GfK, revealed that 34 per cent of mortgages that will mature before 2022 could experience a shortfall of £50,000 or higher.
Meg Gay, author of the 140-page report Interest-Only Mortgages: Consumer Research _ Consumer Strategies for Repaying the Loan at the End of the Mortgage Term, said the ‘interest-only time bomb’ would fail to materialise.
Ms Gay said: “We have started to see some defaults from borrowers who had no repayment strategy but they are at very low levels.
“Lenders are employing extensive post-maturity levels of forebearance, such as extending the terms of a mortgage, and are using repossessions as a last resort.”
The review paper claimed that borrowers, including customers with loans that will mature by 2020, should be able to find a viable way of paying off their mortgage if they acted now.
As a companion piece to the review, The FCA also released a guidance paper for firms on how to ensure the fair treatment of customers who may struggle to pay off their mortgages.
The FCA stressed the need to have a “communications strategy” in place, especially if someone was falling into arrears, and lenders needed to “engage early with interest-only customers” by sending them a range of options to help meet their repayments. The 20-page consultation is open for responses until 3 June.
Martin Wheatley, chief executive of the FCA, said: “By acting now we are aiming to nip this problem in the bud.”
He highlighted the recent trend among lenders to contact their most at-risk customers with a wake-up call to highlight the report’s findings and tell them what they needed to do without delay.
| Key points |
70 per cent of interest-only mortgages that will mature between now and 2016 were endowment mortgages. The average endowment mortgage size is £55,000. Non-endowment interest-only mortgages average £121,000. 81 per cent of interest-only borrowers said they understood the need for a repayment plan when they took out their mortgage. 13 per cent did not know they had to organise a repayment plan. |
Industry view
Paul Smee, director general, Council of Mortgage Lenders, said: “It is reassuring that the regulator’s findings echo our own, and suggest that the majority of interest-only customers are both aware of their repayment obligations and have at least a reasonable plan about how they expect to repay their loan.
“Lenders recognise that they have a valuable role to play in helping their customers to plan ahead, and to take action in good time to reduce the risk of being caught short when the time comes for the mortgage to be repaid.”
Adviser view
Jane King said: “I have come across many people holding interest-only mortgages who have been stuck because they can’t remortgage with another provider which is offering onerous interest-only conditions.
“Some lenders are asking for 50 per cent equity and therefore clients cannot get an interest-only mortgage when it comes to remortgaging.
“It seems by these strict criteria, the lenders don’t want to do interest-only any more. There has been so much scaremongering about the ‘ticking time-bomb’. But the majority of people knew that they would have to have a repayment plan in place.”
