The Financial Conduct Authority has today issued to guidance to lenders and third-party administrators about how to treat interest-only customers who risk being unable to repay their loan.
In May, the regulator launched a consultation in which it sought views on how to deal with these borrowers. It has reviewed the practices of eight lenders, covering 23 brands, that represent 40 per cent of the UK interest-only market.
The FCA says firms should have a written strategy in place setting out their policy and procedural framework for managing loans that may not be repaid in full at the end of the term and should consider what options can be offered. The FCA adds firms should give customers enough time to consider these options.
Alternative options may include switching to a full or part capital repayment basis, extending the mortgage term, accepting overpayments, extending the mortgage term on an interest-only basis or a combination of strategies, the regulator says.
The regulator also says firms should provide procedural guidance for front-line staff on how to execute its strategy and ensure they are trained and monitored when doing this.
Firms should also collate enough information to enable a firm to monitor its interest-only back book, the FCA says. It says the information should be “appropriate and sufficient” to review the performance of the options offered, monitor communications with customers, to review forbearance measures and to measure a firm’s back book exposure to interest-only mortgages.
The FCA says firms should have a communication strategy in place that allows customers who are facing a shortfall enough time to take action. Communications should be “meaningful and encourage customers to respond” and should be in “plain English”.
Lenders should also assess affordability if any variation to an existing mortgage “materially” increases the monthly payment or where the revised terms extend the loan into retirement.
In a document summarising the feedback it had received during the consultation process, the FCA said respondents were generally supportive of the guidance.
But some firms raised concerns this could be seen as a sales opportunity to move customers onto more expensive options such as equity release, while other actively promoted equity release as an option.
Further concerns were around term extensions, where some firms said this could compound the issue further for borrowers, while others suggested indefinite term extensions should be applied if a borrower can afford the repayments.
In May, the FCA published the findings of its thematic review into interest-only mortgages, finding just 13 per cent of borrowers said they did not know they needed a repayment plan when they took out their loan.
Around 2.5 per cent said they were both unaware that they needed a repayment plan at the point of purchase and still do not have a repayment strategy in place. The FCA also found that 90 per cent of the 2.6 million interest-only mortgage customers have repayment strategies in place, meaning roughly 260,000 people currently do not have a plan in place.
However, the FCA said it expects around 48 per cent of interest-only borrowers 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.