Companies could take advantage of people at risk of defaulting on interest-only mortgages to shoehorn customers into more expensive products such as equity release, according to firms cited in the Financial Conduct Authority’s final guidance on interest-only sales.
While equity release may be a viable option for some customers at risk of being unable to pay off the principal of an interest-only mortgage, the FCA has warned that providers should take care to avoid shoe-horning customers into such products.
In finalised guidance, published today (29 August), relating to the repayment of interest-only mortgages, the FCA said some other firms had suggested equity release should be promoted as a potential solution for people unable to pay off their interest-only mortgages.
But the regulator responded: “We recognise that for a select group of customers, equity release may provide an alternative solution to repaying the existing mortgage when other solutions are available.
“However, this will not be the case for all customers, and will depend on their individual circumstances.”
The “vast majority” of interest-only borrowers understood what they were buying and have repayment plans in place, the FCA has said.
In the guidance, the regulator said it could not find evidence of large-scale poor practice in the sale of interest-only mortgages.
The FCA said: “While it is impossible to rule out some instances of poor practice, we are not currently planning further work into historic sales practises. Instead we are focused on encouraging lenders and customers to act now to mitigate potential future customer detriment.”
This is in line with evidence given to the Treasury Select Committee showing only 2.5 per cent of customers claim not to have known what they were being sold. It also suggests Martin Wheatley’s £120bn interest only “time bomb” is more of a damp squib.
In its newly-published guidance the regulator said lenders could consider lowering rates for borrowers at risk of defaulting but are not obliged to.
However, lenders should communicate clearly and early with borrowers, assess affordability and weigh all viable options for repayment.