The findings show that many people should be in a good position to repay their mortgage when it is due for repayment.
However many borrowers, particularly those whose mortgage is due to be repaid before 2020, will need to take control of their mortgage repayment planning now. To that end the FCA, the Council of Mortgage Lenders and the Building Societies Association are working together to ensure lenders contact their borrowers in order to prompt them into checking their plan for repayment is on track and considering the options available to them.
This type of pre-emptive work is indicative of the way the FCA will act in the future, endeavouring to spot potential problem areas and prevent them from developing into bigger issues. By acting now, together with the mortgage sector, the FCA is aiming to prevent interest only borrowers defaulting on their loans in the future.
The FCA believes that with careful planning, consideration and engagement with their lender, many interest only borrowers - even those with loans maturing by 2020 - should be able to find a viable way to pay off their mortgage if they take control now.
Because these people have the least amount of time to find a solution, lenders will be contacting them first, if they have not already.
The FCA will be measuring the impact of these communications to track how interest only customers respond and how many are checking their current repayment plans.
To help lenders understand how they should treat concerned borrowers, the FCA is also publishing proposed guidance.
The measures will make clear the FCA's expectations for firms, and include:
- Considering what options can be offered to interest only customers;
- Having a written strategy setting out the firm's policy and procedure for managing mortgage loans that might not be repaid at the end of the term;
- Training front line staff on how to deal with borrowers in line with their strategy to ensure a fair outcome;
- Having a communications strategy which encourages consumer engagement;
- Assessing affordability if any variation to an existing mortgage significantly increases monthly repayments or revised terms extend the loan into retirement;
- Giving customers sufficient time to consider their options around repaying their mortgage; and
- Collecting sufficient management information to establish whether their overall strategy to the maturity of interest only mortgages is working.
The FCA will be monitoring progress closely and providing further assistance to firms where needed.
Martin Wheatley, chief executive of the FCA, said:
"By acting now we are aiming to nip this problem in the bud.
"Mortgage lenders have volunteered to contact their most at-risk customers with a ‘wake-up call' to highlight the report's findings and what they need to do without delay. We welcome this move and also the sector's commitment to helping its customers try and find a solution - but people must engage with them.
"My advice to borrowers is to not bury your head in the sand - take action now. Understand the terms of your mortgage agreement and take control; work out if you can repay the outstanding amount when your mortgage matures. But you must engage with your lender to discuss how you propose to repay the outstanding loan.
"This is a landmark piece of work and it comes at a critical time: lenders, regulators, and borrowers need to ensure that they grasp the nettle now before it is too late."
Caroline Rookes, CEO of the Money Advice Service, said:
"Today's findings from the FCA shed a fascinating new light on the financial situation of interest-only mortgage customers. On the one-hand, the results are encouraging - it's great to hear so many people have a ‘strategy' to repay their mortgage when it is due. But on the flip-side I'm concerned that many borrowers are still likely to have a ‘shortfall', and urge them to take control of their mortgage repayment planning quickly."
Adam Phillips, Financial Services Consumer Panel Chair commented:
"Interest only mortgages are a useful product when sold correctly and fully understood by those purchasing them. Investigation by the FCA suggests that some consumers with interest only mortgages are likely to find themselves facing a shortfall without a clear repayment strategy. We welcome the FCA's work since early intervention by the regulator helps to minimise consumer detriment and has been one of the Panel's consistent demands."
Ben Thompson, managing director of the Legal and General Mortgage Club comments:
"At the peak of the housing and mortgage market in the mid noughties, interest-only mortgages accounted for over one in every three new mortgages agreed by lenders. Although interest-only had been significantly higher through the 1990s, in those days lenders and borrowers had far more disciplined repayment vehicles. Typically a borrower took an investment such as an endowment alongside their mortgage and planned their own strategy to repay this debt at the end of the original term.
"However, times change and so do house prices and lifestyle requirements. In recent years many borrowers have found it increasingly difficult to meet the stringent requirements of traditional repayment mortgages. Following the credit crunch, a recessionary environment and regulatory intervention the interest-only market has shot from oversupply to undersupply as some lenders have reacted zealously to MMR proposals and overall back book exposure leaving the market now under serviced and uncompetitive.
"Interest-only is certainly not for everybody. Taking an interest-only mortgage for affordability reasons can be dangerous and advisers and customers should hold an honest and searching discussion prior to taking this commitment on. All parties must be aware that at the end of the mortgage term the principal sum must be repaid in full, or the property will most likely have to be sold to satisfy the lender's conditions.
"However, in certain circumstances, such as bonus earners and properties with low LTV interest-only can make good sense and also provide flexibility and choice at a time when the market needs it. Therefore the option should not be dismissed by lenders altogether.”
