The Financial Conduct Authority is warning the many interest-only mortgage borrowers who have not arranged a repayment plan to speak to their lenders as soon as possible, or risk losing their homes.
The FCA said it is concerned shortfalls in repayment plans could lead to borrowers being unable to meet demands for payment from lenders as the terms of their interest-only borrowing come to an end.
Lenders are writing to their interest-only customers to flag they must plan a way of paying off the capital, but borrower engagement rates are low, the FCA said.
Research by the regulator found nearly 70 per cent of borrowers written to fail to engage with their lenders.There are currently 1.67m interest-only and part capital payment mortgages outstanding in the UK, representing nearly 18 per cent of all outstanding UK mortgages.
The FCA reached an agreement with lenders back in 2013, stating that they would write to interest-only borrowers and discuss repayment options. The FCA said at the time that it would measure lenders’ effectiveness at doing this.
At the time there were 2.6m interest-only mortgages outstanding, and the FCA said that one in ten borrowers did not have a strategy to pay back the capital when the mortgage ended.
In today’s (30 January) announcement, the FCA said it had found lenders are actively trying to communicate with their customers to understand repayment strategies and to provide appropriate and affordable solutions where needed.
However, it added the engagement could be improved if lenders tailored their work to different customer types and increased contact with customers that are considered higher risk.
Jonathan Davidson, the FCA's executive director of supervision for retail and authorisations, said since 2013 good progress has been made in reducing the number of people with interest-only mortgages.
"However, we are very concerned that a significant number of interest-only customers may not be able to repay the capital at the end of the mortgage and be at risk of losing their homes.
“We know that many customers remain reluctant to contact their lender to discuss their interest-only mortgage for a variety of reasons. We are very clear that people should talk to their lender as early as possible as this will give them more options when it comes to the next steps they can take.”
He said the FCA had identified several peak times for interest-only mortgages to mature. While we are currently in the midst of one of these peaks, he said these are mainly customers who are approaching retirement with higher incomes, and he is more concerned about the profile of customers whose mortgages will mature in the next two peaks.
These include less affluent individuals who had higher income multiples at the point of application, greater rates of mortgages converted from repayment to interest-only and lower forecast equity levels.
Mr Davidson said the FCA is concerned they are more at risk of shortfalls in being able to pay off what they owe on their mortgages.
“As the number of maturities start to increase towards 2032, it is important that lenders take time to review and, where possible, improve, their own strategies,” he said.
The FCA also commissioned research to find out what stops some customers from engaging with lenders over interest-only mortgages. The research, from Kantar, found there were three different types of interest-only customers who had different reasons for not engaging.
Confident customers did not engage because they already had strategies in place and had other sources of financial guidance, while constrained customers, who had poor options or strategies avoided engaging with their lenders in an attempt to retain their current flexibility.
Meanwhile insecure customers, who feel they have no options, do not engage with lenders because they do not want to confront the situation.
The research found that more personalised letters, providing a clear rationale for responding, such as mentioning other repayment options that are available and making it as easy as possible for customers to respond could improve engagement.
Gemma Harle, managing director of Intrinsic’s mortgage network, said it is crucial the government and the FCA take steps to ensure people are able to remain in their own home.
She pointed to research by Old Mutual published in December 2017 which found the UK’s older population vastly underestimates their likelihood of being in debt in retirement.
Those aged 50 to 75 year hold substantial debt in retirement of £31,011 on average. While in reality 17 per cent of today’s retirees had mortgage debt when they reached retirement, just 6 per cent of those approaching retirement expect to still be paying off their mortgage.
She said it is vital people are prompted to seek financial advice to boost engagement with lenders.
"The research shows that customers who discuss their mortgage with a third party, are likely to feel reassured or more confident about their repayment plans.
“One option being considered in a consultation last year was ‘retirement interest-only mortgages’, which would relax the rules around the ability to retain a mortgage throughout retirement and the mortgage would only need to be repaid on a life event such as death.
“This would be a positive move and offer people another option. It could also have the added impact of allowing people to fund more to pensions and saving for their later life, rather than continuing to fight against debt.
“As is the case with lifetime mortgages, customers should have the safeguards of financial advice to ensure a holistic overview to their retirement planning has been taken."
