Lenders want to ensure that all borrowers have sufficient plans to meet their contractual obligation to repay their mortgage when it reaches maturity.
This coincides with today's release from the Financial Conduct Authority of research and guidance on interest-only mortgages. The regulator recognises that the responsibility for repaying the mortgage lies with the customer, but emphasises that firms should nevertheless have a systematic and consistent approach to communication and practice, to ensure that customers are treated fairly.
Lenders are taking a targeted approach. Anyone with an interest-only mortgage maturing before the end of 2020 should expect to be contacted over the course of the next 12 months by their lender (if they are not already in communication with their lender on this issue) about their repayment plans.
The aim is not to force customers to take actions they do not wish to, but to ensure they are aware of their mortgage repayment position, and have an opportunity to take steps that may prove useful to them in avoiding unforeseen payment shocks later.
It is important that customers take action to review their plans when their lender contacts them, as this will minimise the risk of unexpected shortfall problems later.
CML members are also putting in place further communications with interest-only borrowers whose mortgages are due to mature after 2020. Initially, however, the focus is on customers who have less time in which to consider their options if they do not yet have firm plans in place.
The CML has produced an "interest-only toolkit", which CML member mortgage lenders have already been using for the past year to help them work with customers to minimise the risk of unexpected difficulties when their interest-only mortgage reaches its end date. The CML is today releasing the toolkit publicly, to help inform advice agencies and others about the overall approach that the industry is using.
The CML has also worked with the Money Advice Service on a practical action plan guide for consumers, which provides a useful checklist of actions for people with an interest-only mortgage.
The CML is pleased to note that research commissioned by the FCA confirmed that 90% of interest-only mortgage holders have a repayment strategy in place. However, lenders recognise that even if the numbers are modest, a minority of their customers do not have a plan, and some of those who do have a plan may still face a shortfall. Lenders want to help their customers take action as early as possible to avoid unforeseen problems when their mortgages mature.
Lenders will communicate and work with their interest-only customers to identify whether or not they are at risk, and help them identify how to address any problems that are identified as a result. The nature of the communication will vary, depending on how close the customer is to the maturity date of their mortgage.
Lenders may be able to offer alternative options to some customers to avoid them having to sell their home to repay the mortgage if they do not wish to do this. As the FCA recognises, this is not a contractual right, so the circumstances of the case and the lender's policy will determine what options may be available.
Paul Smee, CML director general, 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.
"Lenders recognise that they have a valuable role to play in helping their customers to plan ahead, and to take action in good time to reduce the risk of being caught short when the time comes for the mortgage to be repaid.
"We are working as an industry to ensure that good, pre-emptive communication with interest-only mortgage customers is the norm. Most people, even if they have not yet done so, have time to plan a satisfactory strategy for when their mortgage reaches maturity."
Martin Wheatley, chief executive of the FCA, welcomed the industry's efforts and reinforced the importance of borrowers responding to lenders' communications, saying:
"We welcome lenders' commitment to pro-active communication with their interest-only customers, and also their commitment to helping at-risk customers to try to find satisfactory solutions to unexpected shortfalls.
"Borrowers themselves do need to respond and engage with their lenders on how they plan to repay. My advice to borrowers is to not bury your head in the sand - understand the terms of your mortgage agreement and take control."
