Lenders must act to help struggling interest-only mortgage borrowers, regulator warns

30 January 2018
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Mortgage lenders must do more to help customers with interest-only loans, the financial regulator has said after a review into the sector outlined poor practice and a lack of engagement with struggling borrowers.

The Financial Conduct Authority (FCA) reports that while mortgage lenders are typically flexible with the 1.67 million interest-only customers in the UK, customer engagement is low and many people are not getting the support they need.

Interest-only mortgages have long been described as a “ticking time bomb” for the industry and the regulator says if lenders do not act it could lead to customers losing their homes in future.

The FCA was also critical of the way some lenders contact interest-only borrowers, an issue highlighted by Moneywise in our investigation into the market last year.

The regulator says that letters are the main way lenders try to contact customers, however many of these contained no personalised details of a customer’s mortgage and lacked “clarity and purpose”. This has led customers to underestimate the importance of their situation and not engage with their lender.

In one case, a mortgage lender chose not to make any follow-up phone calls to borrowers until three months after their mortgage had matured.

The review says that some lenders have also been using non-qualified staff to talk to interest-only customers and this means customers have not been given advice when they could have been. These borrowers were left unaware of their repayment options.

While the number of customers with outstanding interest-only mortgages has dropped, the FCA says this has largely been because rising house prices and household incomes have made it easy for certain customers to switch to a repayment deal.

It says this progress will be difficult to sustain as the remaining customers with interest-only deals are generally in more debt and have borrowed at many times their income.

In the first half of 2017, over a quarter (26%) of all interest-only or part-and-part mortgages - where part of the loan is interest-only and the rest is a repayment mortgage - were to customers with low levels of disposable income, meaning it will be difficult for them to switch to a full repayment product.

A further problem is that 70% of interest-only mortgages are held by customers aged 45 and over, with many due to be past retirement age when they reach the end of their term.

‘Lenders should be doing more’

Daniel Hegarty, chief executive and founder of online mortgage broker Habito, warns that the industry must take action now to prevent large numbers of customers having their homes repossessed in future.

“It is clear that the mortgage industry must go further to engage borrowers if we are to prevent the FCA's predicted wave of homeowners in this situation over the next 15 years,” he says.

“While lenders have improved their attempts to communicate, today’s research shows that there is still much more to do.

“For many, mortgages remain complex and opaque. For consumers to want to engage proactively in managing their mortgage over the lifetime of the loan, lenders need to provide fair alternatives, and fully disclose terms and conditions in language that is simple and clear.”

Jonathan Harris, director of mortgage broker Anderson Harris, adds that options for interest-only borrowers are limited and new products should be launched to help these customers.

“Mortgage brokers are seeing increasing numbers of customers on interest-only mortgages who are the most difficult to help because they are on low incomes, past retirement age or are not engaging with the lender. There are still limited options available across the market with too much reliance on lifetime mortgages as potential solutions.

“Lenders should also be doing more to make proper contact with borrowers but based on volumes, this might not be practical. This means many calls into a lender are fielded by call centre staff without the appropriate level of expertise.”

The FCA says it will continue to monitor the progress made by lenders and has issued a leaflet to help consumers understand their options if they have an interest-only mortgage.

Comments

In reply to by Portland Bill (not verified)

Many people had no idea legislation would change and that interest only mortgages would stop. If there is ample equity in a house, this is this is ample insurance!! An interest only mortgage to be repaid when the house is sold on death is a perfect option for people on low salaries with ample equity in their homes. Additionally, many people were not informed that the pension age would increase, which robbed women of over 40k which would have repaid their interest only mortgages..Taking out insurance policies for every eventuallity is unrealistic and expensive, Not everyone can have well paid jobs or pay high rents. Grow up.

In reply to by anonymous_stub (not verified)

Help, as in advice, should be readily available from the lenders. But help, as in reductions to the amount to be repaid, should not be offered as this would be unfair to those who knew what they were doing when taking out a mortgage, and knew how and when they were going to repay it.It never ceases to amaze me how many people take out loans for up to hundreds of thousands of pounds with little thought of how they are going to repay it.

In reply to by anonymous_stub (not verified)

I bought a house in 2005 mortgage free and had my disabled son born in 2007. By 2010 I had to find a bungalow to move into as my son needed wheelchair access. Therefore I had to get mortgage to get enough money to afford a 3 bedroom bungalow. I sold my house, got the mortgage and bought a bungalow. I began my mortgage in 2010 and paid monthly for my mortgage. In July 2012 I applied for Income Support and was accepted. Support for Mortgage Interest began in 2013. The starting figure was £157.40 a month and it went down as my overpayments affected my mortgage balance. I paid off my mortgage in June 2017 and stopped the Support for Mortgage Interest. I am happy I don't have to go into a loan for Support for Mortgage Interest. A mortgage is a product with rules. Like mine was free overpaying up to £500 more than my direct debit price. I had to pay a 5% fee if I went beyond that. I applied to raise my direct debit in 2015 and they wouldn't let me. In 2016 I managed to put up my direct debit by showing evidence of paying that amount for the previous 18 months. Many people don't have enough money to overpay a mortgage. It is well worth paying more often than once a month. If a person has an online bank account with their mortgage provider this is easy to do. They need to check if they will get fees for doing this though. My mortgage made me feel trapped and I feel a lot happier without it.

In reply to by Angela (not verified)

Always someone else's fault, eh?If you're on a low salary, and take out a loan, who is to blame when you can't repay it? The bank?Insurance too expensive? Again, if that's the case why take out a loan that you possible wont be able to repay if things go badly?Ample equity? What's the problem then?Not everyone can have high paid jobs or pay high rents. Exactly - not everyone can take out large loans.Live within your means. If you don't have those means, don't borrow.Me grow up?

In reply to by anonymous_stub (not verified)

I'm not sure I understand the Regulators point of view. If people are unaware of their financial position and prefer to ignore problems why should the lenders be blamed? I always know my liabilities (and how I plan to meet them) and have done since the mid 1970's when inflation was skyhigh.

In reply to by Angela (not verified)

That's what insurance is for

In reply to by Portland Bill (not verified)

Grow up. Your comment is narrow minded and selfish. People’s circumstances change. it never ceases to amaze me how some people lack empathy and finger point. There are a host of reasons why people take out interest only mortgages. Not everyone is in a position to stay healthy, keep their jobs, or even keep their partners. Nobody can predict what is ahead.

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