Mortgages  

CML warns of legacy interest-only challenges

CML warns of legacy interest-only challenges

The Council of Mortgage Lenders has reminded lenders of the need to communicate with legacy interest-only book ahead of interest rate rises, warning that challenges remain.

The Mortgage Market Review rules stated that interest-only mortgages do have a place in the market and could be used if a consumer has a “credible strategy” to repay the capital at the end of the term.

Ray Boulger, senior technical manager at broker John Charcol, previously told FTAdviser that the proportion of new interest-only mortgages in the residential mortgage market has fallen by over 75 per cent, from a 25 to 30 per cent share of sales to only 6 per cent.

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Speaking to FTAdviser, the Council of Mortgage Lenders’ head of member and external relations Sue Anderson, explained that lenders will need to identify those customers who may benefit from looking at their finances before rates rise.

She added that this is beneficial to ensure they are in a “more resilient position than they would otherwise be”.

Lenders are taking similar approaches to contacting legacy customers, with HSBC stating it contacts customer every five years, reminding them of their responsibility to repay and review their mortgage, ensuring they are on track to pay at the end of their term.

“All customers receive an annual disclosure statement which reminds customers of the risk of rising interest rates,” the bank added.

Lloyds Banking Group’s policy was that it regularly writes to existing interest-only borrowers throughout the term of their mortgage.

“These letters urge borrowers to review their plans and ensure they’re on track to repay.

“If they’re not, we encourage them to get in touch at the earliest point, so we can discuss the options available to them, such as moving some of the balance to repayment ‘capital and interest’, making overpayments or extending the term.”

Meanwhile, Metro Bank noted that as a relatively new entrant to the market it does not have the legacy issues of some other lenders in relation to interest-only mortgages.

“All residential loans on interest-only must have a fully funded repayment vehicle in place to repay the capital at the time of application,” said a spokeswoman.

Virgin Money said that while there is no regulatory requirement to contact mortgage customers ahead of a rate change, it is progressing a number of initiatives to ensure it is helping customers prepare.

“Activities scheduled to land over the next few months include contacting those customers who we believe may be most affected by any mortgage rate increase and new website content covering the potential impact of rate increases, including for example a rate change calculator.”

Interest-only was a major prime lending product between 2005-2008, but since then most lenders have restricted availability to only capital and repayment vehicles, according to Nigel Stockton, financial services director at Countrywide.

Mr Stockton said: “At Countrywide, we speak to every one of our customers who are coming to the end of their product deal and also contact those who we believe are still on a standard variable or interest-only products, with planned communication programmes,” he added.