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.