Guidance for customers with interest-only mortgages
In 2018, the FCA urged action on interest-only mortgages. It estimates there are over 1.7 million interest-only mortgages in the UK, with many nearing maturity and needing to be paid off soon. It is worried that many customers will be unable to do so and is urging lenders to contact the customers and offer alternatives.
It has issued guidance to firms in
Dealing Fairly with Interest-only Mortgage Customers Who Risk Being Unable to Repay their Loan.
1This gives examples of good practice and says lenders should:
•have a written strategy setting out the firm’s policy and procedural framework for managing mortgage loans that may not be repaid in full at the end of the term;
•consider what options can be offered to interest-only customers, either during the mortgage term or at maturity, demonstrating why the firm offers some options and not others;
•provide procedural guidance for front-line staff on how to execute the firm’s policy, with appropriate monitoring to ensure fair and consistent customer outcomes;
•collate enough management information to enable the firm to monitor its interest-only back book and review the performance of mitigation actions taken during the mortgage term or after maturity.
Customers should therefore have already been contacted about their interest-only mortgage and offered alternatives.
Actions to protect consumers should include:
•communicating early and frequently according to the potential risk of non-repayment within the firm’s mortgage book, and communicating more regularly as customers approach the end of the mortgage term;
•giving customers enough time to consider maturity options, especially if the firm’s range of options is limited or if customers must meet specific criteria to be eligible; customers may wish to consider other options and should be given enough time to do so;
•assessing affordability if a variation to an existing mortgage increases the monthly payment or where the revised terms extend the loan into retirement. (Principle 6 of the FCA’s Principles for Businesses (PRIN) states that a firm must pay due regard to the interests of its customers and treat them fairly);
Some interest-only customers may be unable to change their mortgage or move to a different provider. Firms should be able to demonstrate how they have complied with Principle 6 in their treatment of such ’trapped’ customers – eg, they should not unfairly charge them a higher rate of interest than other customers to exploit the fact that they are unable to exit the mortgage.
Lenders should be offering alternatives to the current loans such as:
•switching the mortgage to a full or part capital-repayment basis;
•extending the mortgage term, incorporating a switch to a full or part capital-repayment basis;
•extending the mortgage term to provide more time to repay the capital outstanding or to sell the property;
•accepting overpayments to reduce the end-of-term balance;
•combining part redemption and any of the above;
•extending the mortgage term on an interest-only basis.
•combining any of the above.
Advisers may also want to consider a move to mortgage to rent or a similar strategy for the client.