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Sending letters to customers with interest-only mortgages: Seven golden rules


Published: 17 December 2013 | Author: Bernard Clarke

Daniel Read, professor of behavioural science at Warwick Business School, had been due to address our annual conference in November, but unfortunately was unable to do so. Somewhat unusually for us, we have therefore asked him to present his views to the industry in this article.

Professor Read has drawn on his academic expertise to offer guidance to lenders on seeking to communicate effectively with interest-only borrowers. He wrote this article with Warwick Business School PhD student Ali Osseiran. The opinions expressed are entirely their own, and do not necessarily reflect the views of the CML.

The growing risk of home-owners defaulting on their interest-only mortgages has struck fear into the heart of the lending community. The figure below shows the number of interest-only mortgages and when they are expected to mature, with a peak in 2032. What will happen when those mortgages mature, and we learn that many borrowers have made no realistic plans to re-pay their debt?

Chart One: Residential interest-only mortgages: number of mortgages and maturity horizons, divided into those sold as interest-only, and those converted during the mortgage period 

Chart One Residential interest only mortgages News & Views


Source: Experian, 2013, redrawn by authors.

Having conducted a thematic review on the maturity of interest-only mortgages, the Financial Conduct Authority (FCA) is now urging banks and building societies to contact their interest-only borrowers to confirm that they understand the conditions of their interest-only mortgage, and to find out if they have a feasible plan to pay back their debt. Where no plan exists, the lender will want to find that out too, and will then want to support their customers in resolving their debt problem, ideally by developing a manageable repayment plan.

Contact will most likely take the form of a mailed letter, although other means of communication are of course possible and even desirable. In this article, we will focus on letters.

Psychologists and behavioural scientists have identified several rules and insights to make communications more effective, and in this note we provide a distillation of some key rules that we hope will be useful for those designing letters intended to elicit a response from their customers.

Rule One: Simplicity. Simplicity has a lot of meanings, but to put it simply you should use as few words as possible, and make those words as concrete as possible. Simplicity is needed to get your customer to read the letter, and to ensure that the message you want to send is the one that is received. For each sentence you have written, ask if your customer needs to know the information in that sentence. We suspect you will find that often they will not.

Rule Two: Get right to the point. Tell your customer what you want them to do immediately and provide justification for that request alongside it. Letters commonly begin in a roundabout way that describes the problem, and then gets to the solution. That is ok for a literary essay, but not for a request for immediate action. It is possible, for instance, that you have written a preamble that reminds your customers of what an interest-only mortgage is, as well as some legal details about such mortgages.   Yet what you want your customers to do might be to sign a form acknowledging that they understand the conditions of their mortgage, or to provide a summary of their repayment plan. The preamble can distract from that message. The preamble also increases opportunities for misinterpretation and unnecessary customer distress.

Rule Three: Ask for what you want, and do not ask for more. In particular avoid providing an extensive menu of options. Behavioural scientists have found that too many options can lead to confusion, procrastination, feelings of uncertainty and regret, and even withdrawal from the choice situation. For instance, researchers from Columbia Business School found that increasing the number of investment options in a retirement plan significantly reduced the participation rate in that plan. This is because most individuals do not have the time or the expertise to evaluate all the options available to them, making it very difficult to make a decision, especially a financial one.

The same researchers proposed some strategies to address this problem:

1. eliminate redundant options;
2. make the options very concrete and the consequences clear; and
3. arrange the options into distinct categories.  

The best solution, of course, is to have only one option.

Violations of the first three rules can be found in the familiar Money Advice Service pamphlet “Take action with your interest-only mortgage now”. This attractive and well-written pamphlet was cited approvingly in the FCA’s original press release, and is in wide circulation. The pamphlet provides those who do not have a plan in place with five steps to take, and those who do have a plan with (surprisingly) six steps. In fact, however, the steps are not steps at all but a list of actions that can be taken in any order and in any quantity. They do not even appear to be in order of priority. Moreover, the “steps” all appear to be non-trivial projects, each containing many steps and are very likely to lead to a high level of procrastination.

Rule Four: Put the information where it counts. Research using eye-tracking has taught us a lot about where people look when they are reading letters. The most important findings are that people focus on the centre left hand side of the letter body, and also on headings, tables and images, and that text size matters – text in larger fonts receives more attention. Moreover, detailed text is often ignored. As much as possible, therefore, you will want to make the core message easily derivable from these regions. In particular, the action you require of your customer should be in the top half of the letter, be in a large, bold font, and in a different colour than what surrounds.  

Rule Five: Set a deadline. The biggest enemy for a letter campaign requiring a response is procrastination. A task postponed is often a task abandoned. We have a habit of putting off impending tasks. This widespread tendency is seen in people who put off doing minor chores, in dieters who repeatedly declare they will start their diets tomorrow, and in columnists who delay writing their articles (excluding, of course, the authors of this article). Procrastination is particularly likely when the task is not perceived as urgent, as in making a non-obligatory response to a letter about a debt that will not materialise for another 10 years or more. Research in psychology has shown that setting even a soft deadline can reduce the tendency to postpone tasks indefinitely. Hence, setting a deadline to respond to the letter could promote a sense of urgency, motivate the recipients to act, and prompt them to do so more quickly.

Rule Six: Use norms. Norms come in two types, descriptive and injunctive. Injunctive norms are what we use when we learn that others believe something is the “right” thing to do; descriptive norms when we learn that others are doing it. People are more likely to respond to your letter if you can (truthfully) inform them that others believe they should do so, or that others are actually doing so. A recent study conducted for HM Revenue & Customs by researchers at Imperial College London found that mentioning each kind of norm separately increased compliance with a request to pay tax.

Rule Seven: Align intuition and reasoning Daniel Kahneman’s recent book “Thinking Fast and Slow” brought the concepts of intuition (System One) and reasoning (System Two) to the mainstream. People’s response to a message will be a combination of a fast, automatic and emotional reaction, and a slow, deliberate and intellectual one. Because the emotional response is instantaneous, it provides the tone with which the whole letter, if it is read at all, is evaluated.

One potential method for triggering System One is the use of photographs that convey positive affect. In a recent study by Harvard researchers, people were sent letters from a microfinance firm offering them to take out a loan. The researchers found that adding a picture of a professional looking woman to a letter increased the demand for loans by just as much as decreasing the interest rate on the loan by 2%. The authors of that paper suggested that the photograph triggered an emotional response, which led to a feeling of need which could be met with the microfinance loan. When asking customers to respond to a communication about their interest-only loan, the picture should be chosen to trigger mild emotions related to the loan. A picture of a family, for instance, is likely to raise feelings around home and inter-generational continuity, which will in turn make people likely to want to respond.


The rules we have described are generic ones applicable to all communications, and indeed they are not the only ones we could have offered, but we do think these are easy for any organisation to implement. It should be emphasized, however, that each communication project will raise its own challenges, and it is not always possible to know the best way to meet those challenges in advance. That is why it is essential to test communication strategies using randomised controlled trials (RCTs) before adopting them. In RCTs different strategies (such as letters having different content, or combinations of letters and other media) are tested on small, randomly chosen groups selected from the target population. By using RCTs you can determine which communications have the greatest impact on response rates. RCTs are widely used in medicine and business, and have lately been used by the Cabinet Office and the Behavioural Insight Team, often in collaboration with the FCA, to test the effectiveness of difference public policy interventions. We suggest that lending institutions might consider diverting a small portion of their communication budget on small scale RCT tests prior to making a big launch. We predict the return on investment from this research will more than justify the decision to undertake it.


Daniel Read is professor of behavioural science at Warwick Business School. He has held positions at London School of Economics, Durham Business School, and the Yale School of Management. He conducts research into the behavioural economics of financial decisions, with special focus on choice over time. Daniel can be contacted at

Ali Osseiran is a PhD student at Warwick Business School. Part of his PhD research, conducted in collaboration with Professor Read, is an investigation into factors that influence consumer choices of payment streams, such as mortgages and investments. A short survey based on his research can be found here. Daniel and Ali would appreciate it if you answered the survey, and we will publish a brief note about the results in a few weeks. Ali can be contacted at