Interest-only scrutiny should help borrowers keep on track
Published: 8 May 2013 | Author: Bernard Clarke
Extensive media coverage of the Financial Conduct Authority’s (FCA) findings on interest-only mortgages should help reinforce the need for borrowers to continue to keep under review their plans for repaying their loan.
We want to ensure that all borrowers have a suitable plan in place to fulfil their contractual obligation to pay off their mortgage when it reaches maturity. In the coming months, we will therefore be working closely with the FCA and individual lenders to step up communications with borrowers on this issue.
In publishing details of its research and guidance on interest-only mortgages, the FCA has recognised the principle that the customer remains responsible for repaying the mortgage. Lenders should, however, reinforce this commitment by ensuring they have a systematic and consistent approach to communication and practice to ensure that customers are treated fairly.
We are encouraged that the research commissioned by the FCA has confirmed that 90% of borrowers have a repayment plan in place. The research findings echo our own view of the market, and suggest that a large majority of interest-only customers are aware of their obligations and have in place a reasonable plan for how they expect to repay their loan.
To help lenders work with their customers to minimise the risk of unexpected problems when the mortgage matures, we have produced an interest-only toolkit.
Although we published information about this toolkit to coincide with the FCA’s findings, and to help advice agencies and others understand what the industry is doing to help its customers, it has already been available to our members for a year, and many are already using it as a cornerstone of their plans for communicating with customers.
We have also been working with the Money Advice Service on a practical action plan to help guide consumers. It provides a useful checklist of actions for interest-only borrowers.
Lenders recognise that they have a valuable role to play in helping customers to plan ahead, and to act in good time to reduce the risk of being caught short when the time comes to repay the mortgage. We want to ensure that good, pre-emptive communication for interest-only borrowers is the norm for firms.
The industry’s efforts to communicate with interest-only customers have been welcomed by the FCA, which also emphasised the importance of borrowers responding to attempts to communicate with them by lenders. The FCA’s chief executive Martin Wheatley said:
"We welcome lenders’ commitment to pro-active communication with their interest-only customers, and also their commitment to helping at-risk customers to try to find satisfactory solutions to unexpected shortfalls. Borrowers themselves do need to respond and engage with their lenders on how they plan to repay. My advice to borrowers is not to bury your head in the sand – understand the terms of your mortgage agreement and take control."
Lenders are taking a targeted approach to the issue, so anyone with an interest-only mortgage maturing before the end of 2020 should expect to hear from their lender in the next 12 months, if they are not already in communication with the firm.
Borrowers will not be forced to take act against their wishes. But lenders will be trying to make sure that customers are aware of their requirement to repay their loan, and have an opportunity to take steps that should prove useful in avoiding unforeseen payment shocks later.
Interest-only borrowers should regularly review their plans for repaying their loan. If they have not already done so, it is important that they respond when they are contacted by their lender, as this will reduce the problem of an unexpected shortfall later.
Lenders are also putting into place plans to communicate with interest-only borrowers whose loans are due to mature after 2020. Initially, however, the focus will be on those customers who have less time to consider their options if they do not yet have proper plans in place.
Although we are pleased to note the FCA’s finding that 90% of interest-only borrowers have a repayment plan in place, we recognise that a minority of customers do not have a repayment plan, even if the numbers are modest. We also accept that some of those that do have a plan may still face a shortfall.
The intention is that lenders will communicate and work with interest-only borrowers to identify whether or not they are at risk, and help them work out how to address any problems that are identified as a result. How lenders communicate with their customers will vary, depending on how close the borrower is to the date on which their mortgage matures.
Lenders may be able to offer alternative options to some customers to avoid them having to sell their home to repay the mortgage if they want to avoid this. But, as the FCA acknowledges, this is not a contractual right. So, the circumstances of the case and the lender’s policy will determine what options may be available.