RegulationMay 2 2013

FCA: Act now on interest-only shortfalls

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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.