View more on these topics

Have lenders defused the interest-only ‘time bomb’?

The Council of Mortgage Lenders says lenders are “meeting their commitment” to interest-only borrowers but brokers say they have barely scratched the surface

Brokers warn that interest-only mortgages remain a “ticking time bomb” despite efforts from lenders to communicate with borrowers.

The Council of Mortgage Lenders last week announced lenders had “successfully met the commitment” to contact interest-only borrowers to discuss their repayment strategies.

In May 2013, lenders pledged to contact interest-only customers due to reach the end of their mortgage term by 2020. The move followed an FCA thematic review which found that over 50 per cent of interest-only borrowers will not be able to repay their mortgage at the end of their term. A third of those were expected to have shortfalls of over £50,000.

Lenders have now completed the contact exercise. Of the 800,000 borrowers whose interest-only terms are due to end by 2020, responses have been received from 30 per cent, or 240,000.

‘Forward-looking action’

The FCA has lauded lenders for taking steps to put customers first.

FCA chief executive Martin Wheatley says: “This forward-looking type of action is a prime example of a model demonstrating good conduct and putting customers first; it is good to see that real progress is being made.”

Despite the apparent success of the CML initiative to contact borrowers, brokers remain deeply concerned about interest-only borrowers. 

Your Mortgage Decisions director Dominik Lipnicki says: “Interest-only is still a time bomb waiting to explode. It is one thing for lenders to say ‘We have contacted our interest-only borrowers’ but it is a different thing altogether if no detailed advice is provided on how these guys are going to pay off their outstanding loans. What happens when these chickens come home to roost? Are all of these clients going to have to sell their homes?

“This situation is not as rosy as the CML is suggesting. People may have alternative plans for repaying their mortgage such as investments or endowments, which may fail. They may be left with no choice but to sell, something they would rather not do when they have worked hard to call the property their own.”

Start Financial Services manager Tom Cleary suggests the information gathered by the CML may not be a true reflection of borrowers’ circumstances. “To say we are on track based on a 30 per cent response rate is a stretch,” he says. “The data is obviously going to be polarised because people who have a plan in place are clearly going to be more
inclined to respond.

“If a borrower is worried because they have no strategy and they have been burying their head in the sand, I don’t think it is likely they will write back to their lender and say ‘I haven’t got a clue’.”

Perception Finance managing director David Sheppard agrees. He says: “It is likely the 30 per cent response rate indicates that it is only those people who have the means to pay back their interest-only borrowing. The ones who do not are less likely to respond for fear that they could end up with having to move to repayment. 

“It is easier for people to hide from it and hope something happens to provide a means to pay it off.”

Cleary argues lenders should go beyond the “2020 promise”.

He says: “In the next 10 to 15 years we will see a massive amount of interest-only borrowers who are faced with a mortgage they cannot repay. They need to be looked at and lenders should not ignore that situation.”

More proactive

Cleary and Sheppard say lenders should take a more proactive approach to contacting borrowers, rather than meeting a commitment by sending a one-off letter.

Sheppard says: “Lenders should be doing more with these borrowers. A lot of lenders wrap an annual reminder into the mortgage statement and I question how many people will see that. 

“A letter solely focusing on the interest-only element of the mortgage will raise more awareness.”

Cleary warns failure to take further action on interest-only could lead to huge problems in the future.

“Lenders should definitely be doing more to engage with their interest-only borrowers,” he says. “I imagine the letter they sent out was as simplistic as could be and asked very little about the details of repayment plans.

“Lenders have a responsibility to help borrowers prepare for repayment. It’s all very well saying ‘Look, we’re on track,’ but a 30 per cent response rate is not a true reflection. This needs to be done properly to avoid havoc later.”

Interest-only in numbers

2.8m

Total number of interest-only borrowers in the UK

800,000

Number of interest-only borrowers due to repay by 2020

240,000

Number of interest only responses

£320bn

Total outstanding interest-only balances

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. Steven Pearman 23rd June 2014 at 2:58 pm

    One could take the view that the reason so few people have replied is because there is nothing like as big an issue is because most people are actually happy with their arrangements and dont feel the need to justify the decisions they have made. Just had an endowment pay out 10% over target. I wonder what I would have got if I had not needed to pay for all the paperwork telling me it wouldnt achieve?

  2. Residential interest only mortgage loan are not really a major problem the vast majority of the loans will be repaid eventually when the borrowers die or go into care but in many cases they will be paid off well before either of these events.

    What is much more is important is all the tens of thousands of But to Let borrowers all of which have on average eight mortgages and all on an interest only basis. This is the “time bomb” as when property prices inevitably fall most lenders will be in great difficulties. The sooner the Government regulates the BTL mortgage sector to ban interest only mortgages in this sector the better. It will also help to drastically reduce the £13 billion tax payer subsidy to landlords and therefore help to reduce the huge UK budget deficit each year. The Government then can consider terminating the “help to buy” scheme but not before something is done to reduce the out of control BTL mortgage sector as this is the real “time bomb”.

Leave a comment