Interest-only mortgage timebomb puts owners at risk of losing homes, FCA warns

The Financial Conduct Authority (FCA) is warning borrowers with interest-only mortgages that they may be at risk of losing their homes due to a lack of communication with their lender.

In 2013 the FCA identified three residential interest-only mortgage maturity peaks, with the next two in 2027/2028 and 2032, and has been periodically monitoring how lenders are treating interest-only borrowers.

Its research found that almost one in five mortgage customers have an interest-only mortgage and those that communicate earlier about repayment plans tend to find solutions to repaying the capital.

But the regulator is concerned that the next two peaks will contain a higher proportion of less affluent individuals than the current maturities taking place now.

The City watchdog’s research found that although lenders were recommending repayment options that appeared appropriate for those customers who made contact and that the harm of repossession due to non-repayment was reduced, the processes which customers had to follow were, on many occasions, challenging.

This included delays in getting to speak to advisers, making multiple phone calls and repeating information previously provided.

Jonathan Davidson, executive director of supervision for the FCA, said: “Since 2013 good progress has been made in reducing the number of people with interest-only mortgages. However, we are very concerned that a significant number of interest-only customers may not be able to repay the capital at the end of the mortgage and be at risk of losing their homes.

“We know that many customers remain reluctant to contact their lender to discuss their interest-only mortgage for a variety of reasons. We are very clear that people should talk to their lender as early as possible as this will give them more options when it comes to the next steps they can take.”

“We are encouraged to see that lenders have taken positive steps to engage with and help their interest-only customers. However, as the number of maturities start to increase towards 2032, it is important that lenders take time to review and, where possible, improve, their own strategies.”

Commenting on the research, Paul Smee, head of mortgages at banking trade body UK Finance, said: “The report reveals good progress by lenders, and the industry understands the need to maintain this. It highlights some areas for improvement, which the industry will take on board.

“Lenders have already improved communication with their customers and will continue to do so, to ensure that customers looking for the right option at the end of their interest-only mortgages get the right advice and support. Lenders also recognise the need to maintain contact with their customers through the life of their interest-only mortgages.”

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