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FCA estimates 48% of interest-only borrowers will have a shortfall

The Financial Conduct Authority believes around 48 per cent of borrowers with interest-only mortgages to have a shortfall when their loan matures.

Moreover, the regulator expects the average shortfall to be £71,850 over the 30-year period to 2042, falling to £56,200 for those due to pay off their mortgage by 2022.

The results were revealed in the FCA’s survey of 1,100 interest-only borrowers, one of two strands of work that make up its thematic review on interest-only mortgages. As part of the survey, borrowers were asked if they expected to have a shortfall when their loan matures.

To work out the potential shortfall of respondents, the FCA assumed the borrower’s current repayment vehicle remained in place and is added to at a consistent rate. However, the estimate does not account for the consumer increasing the amount of money contributed to their chosen repayment vehicle or changes in the wider economy.

The FCA’s expected shortfall figures are significantly higher than borrowers’ expectations of their shortfalls.

Around 37 per cent of respondents think they may have a shortfall upon maturity, with the average shortfall expected to be £22,100, just under £50,000 less than the FCA’s modelled estimate.

Those interest-only holders who expect to have a shortfall were asked how they would deal with it. The most common answer given was savings – 21 per cent – with the next most popular action being downsizing, at 19 per cent. Around 15 per cent said they would remortgage.

Most interest-only mortgage holders regularly check their plans are on track, with 70 per cent doing so at least once a year. Around 11 per cent check less often than annually, while 14 per cent never check they are on track.

FCA chief executive Martin Wheatley says: “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.

Table: Comparing reported shortfall (left) and FCA’s modelled shortfall (right) by maturity date:

Shortfall

 Click image to enlarge

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