A 21-page paper sets out what the regulator expects from lenders when dealing with customers who may not be able to repay the capital sum at the end of their mortgage term, citing the importance of effective and early consumer engagement to minimise the risk of non-repayment.
The guidance was accompanied by a summary paper including feedback from the FCA’s May consultation on how to deal fairly with customers at risk of defaulting.
However, while the regulator claims respondents to the consultation “were generally supportive of the guidance”, with opinions drawn from consumers, firms, trade associations and consumer representatives, it was arguably devalued by the fact that only nine people bothered to respond.
The guidance paper itself calls for lenders to formulate a written strategy for managing loans that may not be repaid in full at the end of the term, and for lenders to consider what options could be offered to customers.
Alternative options include switching to a so-called part-and-part arrangement which pays part of the capital back, or a full repayment vehicle, in addition to extending the mortgage term, or switching to an equity release product.
However, the paper also warned that not all customers would be suitable for the equity release solution.
Lenders were also urged to consider mortgage prisoners, and not unfairly charge customers a higher rate than others to exploit their position.
The guidance followed the April publication of the FCA’s thematic review into interest-only mortgages, which revealed that while 90 per cent of customers had a repayment strategy in place, some 37 per cent had a “definite or possible” shortfall based on their own estimates.
It also found that 2.5 per cent of consumers claimed they did not know at the time of sale that they had been sold an interest-only mortgage, and would need a repayment vehicle.
£22,000 - the average amount owed by the 37 per cent of consumers who saw a definite shortfall on their mortgage payments
34% - the percentage of mortgages expected to mature before 2022 that may experience a shortfall of £50,000 or higher
Source: GfK/FCA interest-only thematic review
Oliver Whitehead, managing director of London-based mortgage intermediary Oportfolio, said: “Interest-only mortgages are certainly good for some people, but they need to be aware of the implications. The current situation where many are struggling to pay goes back when brokers stopped selling endowments, and simply sold the mortgages as a low-cost alternative to repayment mortgages.”