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FCA: No evidence of widespread misselling of interest-only loans

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The Financial Conduct Authority says there is no evidence of widespread misselling of interest-only mortgages after research shows just 13 per cent of borrowers say they did not know they needed a repayment plan when they took out their loan. 

The regulator has spent the last year conducting a thematic review on interest-only mortgages to understand the true extent of the problem of people being unable repay their loan in full at the end of the term.

It has today published its findings today in two reports, one of them a survey of 1,103 people measuring consumers’ readiness to repay the capital due and the other measuring the stock of outstanding interest-only mortgages.

As part of the survey, consumers were asked “When you took out the mortgage, did you know that you needed a repayment plan that would repay the capital and that this was separate to the interest payments?”.

Around 81 per cent of respondents replied “yes”, 13 per cent said “no” and 6 per cent replied that they were not sure.

Moreover, 2.5 per cent of respondents replied that they did not know about the need for such a plan at the point of purchase and still do not have one.

The FCA also found that 90 per cent of the 2.6 million interest-only mortgage customers in the market have repayment strategies in place.

Customers’ awareness of the need for a repayment vehicle has remained broadly similar no matter when the mortgage was taken out.

Some 82 per cent of borrowers who took out an interest-only mortgage up to 1990 said they were aware of the need to have a repayment plan in place, increasing to 83 per cent for mortgages taken out between 1991 and 1999. Awareness dipped to 76 per cent between 2000 and 2004, before increasing to 80 per cent between 2005 and 2007 and 88 per cent for loans taken out between 2008 and 2012.

When asked if the figures showthat there was little evidence of interest-only misselling, FCA manager of mortgage thematics Meg Gay says: “Do we think there has been any widespread problem? No, we do not. Obviously within any market there might be isolated cases of poor practice and that is why we have the complaints process that we have if anyone feels they were genuinely misled.”

Association of Mortgage Intermediaries chief executive Robert Sinclair says: ”In this substantial study of the issues surrounding the maturity of interest-only mortgages, the FCA has not found evidence of systemic mis-selling in the residential interest-only market. 

”It has found that the vast majority of consumers who took out these products understood the terms associated with the loan.  However, some customers will need support to ensure that they are able to appropriately manage the maturity of their interest-only mortgage.”

Table: Proportion of interest-only purchasers who were unaware, at the point of purchase, that they needed a separate repayment plan (by bands of year mortgage arranged):

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Comments

There are 21 comments at the moment, we would love to hear your opinion too.

  1. It isn’t the fact that people weren’t aware they needed a repayment vehicle, it’s the fact that they weren’t given any other option and were promised that the endowment policy they were coerced into taking out, would pay off their mortgage and with the surplus, they’d be living it up in Barbados, etc… If that’s not misspelling, what is?

  2. The illustration, mortgage offer and every annual statement since November 2005 have all made the need for a repayment vehicle is needed for an interest-only mortgage cystal clear.

    So I wonder what planet and/or substance borrowers who don’t know are on.

  3. Anon @ 9.04
    What are you on about?
    They do not have a repayment plan, endowment or otherwise.

  4. I pity the 2.5% that don’t have any thing in place at present but really! ! ! What have they been doing with their mortgage for all these years? They have stuck their head in the sand.

  5. I cant believe you were promised Barbados and I was only promised Spain. This option was never explained to me. Complaint to the commission of gullibility on its way.

  6. A very costly exercise to state the bloody obvious as usual !

    Still they couldnt find widespread commission bias but we still got RDR !

    Now we have MMR – I’ve got a feeling !

  7. 19% didn’t know they were not repaying the loan! What a thick nation! What the hell do they teach ’em in schools? Why do people not know that when you borrow money you pay interest on the loan and you have to repay the loan? There should be a special re-education course for all Maths teachers. No one should leave school not knowing how a loan works!

  8. @ Anon 9.04

    Apart from Misspelling/mis-selling I agree completely. Interest only was basically a conspiracy over time between lenders, advisers and life offices. Life offices dropped out after the endowment bru-ha leaving the whole concept even flakier than it was before.

    No evidence of mis-selling is not what appeared on the BBC Radio Breakfast show this morning. It was also BBC News first item. Basically this piece was an open invitation to the CMC to make hay. Advisers who entertained advising on these loans have left the CMC an open goal. I have always been of the view that if you can’t afford a repayment loan, you can’t really afford the property. Future promises and expectations are the Micawber route.

  9. RegulatorSaurusRex 2nd May 2013 at 9:33 am

    We the regulators will now leave the banks to decide whether to offer interest only mortgages to customers who are fully aware of the consequences of not having a specific repayment method in place.

  10. Hats off to the FCA for identifying that a small problem is not an earth shattering event. There are always people who will ignore every fact put in front of them. Nice to see that such stupidity remains the responsibility of the mortgagee and not the rest of the industry.
    Perhaps we may see the return of caveat emptor.

  11. Dick Sprinkler 2nd May 2013 at 9:44 am

    @ Regulatorsaurusrex

    Spot on – free markets (free of regulatory interference) and all that !

  12. I subscribe to the view that financial institutions and financial services individuals are on a position of power over ordinary consumers when advising on or arranging a financial transaction.

    However, interest only mortgages and repayment vehicles…. the article may as well be head up as ‘13% of people believe the magic mortgage pixies are going to buy their house for them as a present at the end of the term’

    Perhaps some people should be protected from entering into such transactions? If you’re too stupid, you will not be allowed to purchase your house via a mortgage.

  13. if a person’s ATR suggests they are speculative then surely there is a very logical reason to consider investment-backed mortgages.

    Meanwhile, i seem to recall that under ‘The Mortgage Code’ due consideration had to be given to flexibility.

    So, Mr Katz whilst i am happy to concede to your wisdom on a number of items, should a full repayment be affordable (i agree with you here) then i would not automatically advise to use this route.

    If a mortgage of £1,000pm is contracted and then the borrower suffers employment issues or such they could well struggle.

    If a payment of £600pm for instance was contracted but the borrower makes £400pm voluntary overpayments then they have of course a repayment mortgage BUT with the added flexibility of being in control in the case of short-term issues.

    Perhaps the problem today is that the regulators (and CMCs) have frightened us into NOT giving any advice that could be problematic in the future?

  14. If a joint life endowment with a target of £30,000 and premiums of £60 per month matured at only £18,000 after 25 years, the couple have at least had 25 years of free life cover. When we bought our first house in 1979 our 20 year endowment plan matured at twice the outstanding debt. The problem is the inflexibility of traditional mortgages. Redrawable overpayments are an ideal way to get the debt down and pay off the mortgage early. Redrawable because who knows, 25 years, could be times of weak cashflow.

  15. Interesting little fact. There’s only about 1.5m endowment policies left in force and many of them will be maturing between now and 2017. So this is not an endowment problem and it shoudln’t be confused as such. Even for those that have endowments, the shortfalls are relatively small and the endowment will have gone a good way to mortgage repayment. It’s the people with no plans to repay except a lottery ticket and lots of hope who are both a problem and deserve a right good kicking.

    This is a “I want to get on the Property Ladder at any cost” problem.

    So far so good from the FCA but they need to make it quite clear to these people, that when they get to the end of the mortgage and cannot support an extension on proper terms, then they will have to lose their homes. Homes, I must reiterate, ARE NOT THEIRS AND NEVER HAVE BEEN so don’t start bleating.

  16. Whats the problem anyway? 2nd May 2013 at 11:30 am

    Somone rents for 25 yrs – pays £x per month. Saves nothing extra, so has no capital so has to carry on renting after 25 years.
    Or
    Someone buys on interest free mortgage, probably pays LESS than £x per month. Saves nothing extra so has no capital so has to rent from 25 years as above BUT now also has a capital lump sum from property growth over 25 yrs.
    Yes of course saving extra and clearing the loan would be even better, but lets not feel sorry for the interest only borrower after 25 years, theyre much better off than if they didnt do it.

  17. One further point not covered. Interest only mortgages are often better than the alternative, renting. The monthly interest payments are usually less than the rent, and there is chance of some capital growth in the property value. This is surely better than a lifetime’s renting. The mortgage will be repaid on sale of property. What is wrong with that?

  18. Like Harry, I too heard the radio 5 report this morning at 7:00 and having now sat and looked at what was actually reported, I can only express my dissatisfaction (again) about the reporting.
    I sometimes wonder whether the endowment compensation was used to repay some of the loans and to rearrange their borrowing (having got their share of the proceeds claims companies wouldn’t have helped would they?) and of course we must remember that the FSA encouraged lenders to help their borrowers threatened with repossession. So in the case reported this morning you can imagine the distressed borrower asking for help and the lender saying nice things to reassure her and doing what was best. The reality was that the alternative was repossession.
    But as the FCA state, most borrowers knew at outset that they needed a repayment vehicle. To subsequently say (and these are in the vast minority) that they were no longer aware of the needs is a little strange.

  19. Will the reality be that forbearence turns into lifetime mortgages? Pay the lender interest for life/until re-paid?

    Cue redress claims from little darlings expecting to live off an inheritence that doesn’t exist.

    This really does make me quite cross.

  20. I think the more interesting thing here is the long-term effect on house prices as surely this means that lenders will have to make sure that there is a repayment vehicle in place when considering interest only and putting in adequate checks.

    Even if you restrict the loan to value on interest only you’re still going to have a considerable effect on house prices as the option of taking out the maximum mortgage on an interest only basis to get a larger house is no longer going to be available to borrowers.

    I think the FCA’s done a good job of highlighting this problem as maybe it might take a bit of wind out of newspapers and organisations like Right Move who are constantly talking the market up.

    We still have a massive problem in the mortgage market with affordability and the interest only is a ticking time bomb for a lot of borrowers.

    I would’ve said that the problem is much larger than been reported as I remember reading a Standard Life article if you years ago that claimed that 50% of all of the mortgages in London are on interest only, no wonder house prices went through the roof.

    We live in a very different world and compulsory mortgage advice next year will hopefully help to solve this problem as long as industry standards on advice is based on repayment affordability.

  21. I bought one of these loans because there was no other vehicle available (note its not in areers) Note too that the Industry and the Government decided to lock the likes of me in and then proceed to impose their own inflated interest rate with impunity on their captive market. My broker actually reccomended this mortgage when he/she should not have; transpires it was the juicyest commission route – how clean you all must feel! Sleep well my lovelies, what goes round comes round! x

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