The Financial Conduct Authority published its preliminary analysis into the “ticking timebomb” feared to be lurking within the interest-only mortgage market last week.
The regulator’s predecessor, the FSA, promised a thorough investigation following the final publication of the Mortgage Market Review in October. In March 2012, FCA chief executive Martin Wheatley stirred up some anxiety when he made the timebomb remark in reference to the large proportion of people who were thought to have an interest-only mortgage in place without the means to repay the loan when it reaches maturity.
Tensions further mounted when claims management companies started to declare an interest in the sector, announcing the interest-only market was primed for a misselling scandal.
The FCA’s investigation found that 48 per cent of interest-only holders are expected to have a shortfall on maturity, with the average shortfall predicted to be £71,850 over the 30 years.
However, the investigation determined that nine out of 10 interest-only borrowers do have a strategy in place for paying back the sum at the end of the term. Among the 10 per cent of respondents who do not have a repayment vehicle in place, 24 per cent said they did not know at point of purchase that they needed a separate repayment plan. This amounts to just 2.4 per cent of all interest-only borrowers.
Of the 90 per cent with a repayment plan, 81 per cent confirmed they were well aware when they took on the commitment that they would have to pay back the agreed amount.
Some 13 per cent of these borrowers say they did not know they needed a repayment plan when they took out their loan but have since made arrangements in order to meet repayment obligations, while 6 per cent say they are not sure.
The FCA has effectively ruled there is no evidence of widespread missselling, putting paid to speculation on the prospect of a brewing scandal.
The Intermediary Mortgage Lenders Association executive director Peter Williams says: “By confirming that nine in every 10 interest-only borrowers have a repayment strategy in place, the FCA’s research should put an end to misguided reports of a misselling ‘scandal’ when the market boomed between 2002 and 2007.”
John Charcol senior technical director Ray Boulger says the fact there are so few people who might be in a position to lodge a misselling claim, on the basis of this 2.5 per cent figure, means claims management companies will find little incentive to pursue cases.
He says: “The most important thing the report has demonstrated is why there is going to be very little mileage in the ambulance chasers. There were only 2.5 per cent of people who did not fully understand what they got and do not have a suitable repayment strategy. A very high percentage of those who did not realise what they had, subsequently realised and put a suitable vehicle in place.
“This is not going to provide much for the ambulance chasers as the costs they will incur trying to find this 2.5 per cent of people will not make it commercially viable.”
The FCA has further emphasised that, while lenders must be clear about how they are going to deal with the proportion of borrowers who are unable to pay back their interest-only mortgage, responsibility lies with the borrower. Taken together, the feeling from the industry is that there is now the capacity for the interest-only market to return some degree of stability.
A large number of lenders decided to pull out of interest-only altogether rather than stay in an uncertain market. The Co-operative Group, Nationwide, Yorkshire Building Society, HSBC and Accord Mortgages have all withdrawn over the past year.
Your Mortgage Decisions director Dominik Lipnicki says, while the view is not that the interest-only market will ever return to pre-credit crunch levels, lenders will gain confidence from the results of the thematic review.
He says: “A carpet ban on this type of lending is just totally over the top and we are starting to see a more sensible discussion going the other way. We believe there are plenty of clients where interest-only is a viable option and many lenders overreacted by pulling out of the market completely. Hopefully this will signal some sort of rebalance. No one wants to go back to how it was but I think a sensible conversation needs to be had as interest-only still has a place in the market.
“The anti-interest-only feeling has gone too far and a rebalance is needed. It should not be the dirty word it has become.”
Moneysprite director Ashley Brown says: “Interest-only still needs to be seen as a sale requiring special care when recommending, but confirmation that widespread misselling did not happen may allow some lenders headroom to be more flexible in this space going forward.
“I think it allows lenders a bit of breathing space to review their own policies and take things in a more positive direction. Going forward, we are going to see a loosening of interest only criteria with lenders. There will probably be more choice for customers who want to take interest-only as an option.”