Regulator steps in to head off interest-only mortgage crisis
The new financial regulator has warned that borrowers need to take control of their interest-only mortgage repayment planning now if they want to be able to pay them back at maturity.
The Financial Conduct Authority (FCA) has published the findings of its review into interest-only mortgages and found that many borrowers should be in a good position when their mortgage becomes due for repayment.
Some 600,000 borrowers will see their interest-only mortgages mature before 2020 and around 90% have a repayment strategy in place.
However, the regulator found that almost half will have some degree of shortfall when it comes to the time to repay and, of these shortfalls, a third are expected to be more than £50,000.
The FCA says those that will be affected are typically "individuals with relatively high incomes, high assets and high levels of forecast equity in the property at the end of the term", meaning they should have back-up options available to them. Lenders, however, will contact these individuals and the FCA says it intends to "measure the impact" of these communications.
The regulator has been praised for taking early action on the issue by many industry commentators, particularly those who have been historically sceptical of interest-only mortgage products.
"This review shows the FCA is looking ahead and is prepared to tackle emerging problems that could cause considerable detriment to consumers if left unaddressed," says Delroy Corinaldi, director of external affairs at debt charity StepChange.
"The mortgage sector must show forbearance to borrowers, both in the short and long-term. The prospect of people facing eviction or repossession should be avoided as long as they can continue to afford to make payments."
No room for complacency
Some experts are still dubious as to whether the issue will be resolved in time though. "With one in 10 borrowers having no plan as to how they are going to pay off their loan there is simply no room for complacency for lenders or older consumers," says Michelle Mitchell, director general at Age UK.
Mitchell would like to see "arbitrary" age limits on loans, which prevent older people extending their mortgage terms, lifted by banks and building societies. "Decisions on lending should be based on whether an individual is able to repay a loan, not on an outdated vision of what it means to be older," she adds.
Paul Broadhead, head of mortgage policy at the Building Societies Association, says the fact borrowers have time to take action to deal with any shortfall is a positive step and interest-only mortgages still have a place in the market, saying they "remain a suitable solution for some borrowers today".
He is pleased that additional communications from lenders will be carried out to help those whose mortgages are coming up to maturity but warns, "ultimately the responsibility to repay a mortgage remains with the borrower".
This article was written for our sister website Money Observer
A homeowner’s worst nightmare; repossession is an action of last resort by mortgage lenders to recover money from borrowers that have failed to keep up with repayments on their mortgage or other loan secured on their home (see secured loan). Repossession is a legal procedure that has to go through several processes before the homeowner is evicted and the property reposed. These are: if a borrower keeps defaulting; the lender applies for a solicitor’s notice; the lender instigates possession proceedings through the court; at the court hearing a possession order is granted and sometimes a possession warrant; a bailiff is appointed and an eviction notice issued at which point the homeowner has two to three weeks to vacate the property.
A loan in which the borrower pays only the interest on the sum borrowed for the life of the mortgage but, at the end of the mortgage term, they still owe what they originally borrowed as this remains unchanged. The advantage of an interest-only mortgage is the monthly repayment is considerably lower than for a comparable repayment mortgage. Lenders generally insist the borrower also invests in an endowment, ISA or pension savings policy that, on maturity, is intended to pay off the capital loan.