The Financial Conduct Authority (FCA) has published its research into consumers’ ability to repay their interest-only mortgages when they mature. The findings show that many people should be in a good position to repay their mortgage when it is due for repayment.
However many borrowers, particularly those whose mortgage is due to be repaid before 2020, will need to take control of their mortgage repayment planning now. To that end the FCA, the Council of Mortgage Lenders (CML) and the Building Societies Association (BSA) are working together to ensure lenders contact their borrowers in order to prompt them into checking their plan for repayment is on track and considering the options available to them.
This type of pre-emptive work is indicative of the way the FCA will act in the future, endeavouring to spot potential problem areas and prevent them from developing into bigger issues. By acting now, together with the mortgage sector, the FCA is aiming to prevent interest only borrowers defaulting on their loans in the future.
The FCA believes that with careful planning, consideration and engagement with their lender, many interest only borrowers - even those with loans maturing by 2020 - should be able to find a viable way to pay off their mortgage if they take control now.
For those set to repay their loan before 2020, the key findings show that:
- Around 600,000 borrowers will see their mortgage mature in this period;
- About 90 per cent of all interest only borrowers have a repayment strategy (many of these borrowers will have had a mortgage linked endowment policy);
- Just under half of all interest only borrowers are modelled as likely to have a shortfall;
- A third of the 2020 shortfalls are expected to be over £50,000; and
- Typically these are individuals with relatively high incomes, high assets and high levels of forecast equity in the property at the end of the term, so many will have backup options even where their intended repayment strategy does not work out as they had hoped.
Because these people have the least amount of time to find a solution, lenders will be contacting them first, if they have not already.
The FCA will be measuring the impact of these communications to track how interest only customers respond and how many are checking their current repayment plans.
The study also looks further ahead. Over the next 30 years, the key findings are:
- 2.6 million interest only mortgages will be due for repayment and while nine out of ten (90 per cent, 2.34 million people) have a strategy to repay their mortgage, 10 per cent do not – equivalent to 260,000 people.
- Some borrowers are underestimating the problem as around a third (37 per cent) believe they may not have enough money to pay off the loan, yet estimates produced for the FCA suggest that the figure is closer to half (48 per cent).
- Borrowers who are able to give a figure believe their shortfall will be, on average £22,100. However estimates produced for the FCA are that around half these shortfalls are expected to be over £50,000.
- Those expecting a shortfall say they will use savings (21 per cent) or downsize (19 per cent) to pay off their mortgage, while 15 per cent say they will remortgage.
- The vast majority of interest only borrowers (81 per cent) say they understood the terms of the loan at the point of sale. But 13 per cent say they did not and another 6 per cent were unsure. However, only 2.5 per cent were both not aware at point of sale and currently do not have a repayment strategy in place.
- While most borrowers (70 per cent) check their annual mortgage statement to ensure they are on track to repay at maturity, about one in seven (14 per cent) never check.
- The average outstanding balance of an interest only mortgage customer is £55,000 for those with an ‘endowment mortgage’ (i.e. one that was sold backed by an endowment policy), and £121,000 for those without.
(See Notes to Editors for information on the three peak periods in the future when residential interest only mortgages will mature.)
Helping lenders achieve good outcomes for borrowers
To help lenders understand how they should treat concerned borrowers, the FCA is also publishing proposed guidance.
The measures will make clear the FCA’s expectations for firms, and include:
- Considering what options can be offered to interest only customers;
- Having a written strategy setting out the firm’s policy and procedure for managing mortgage loans that might not be repaid at the end of the term;
- Training front line staff on how to deal with borrowers in line with their strategy to ensure a fair outcome;
- Having a communications strategy which encourages consumer engagement;
- Assessing affordability if any variation to an existing mortgage significantly increases monthly repayments or revised terms extend the loan into retirement;
- Giving customers sufficient time to consider their options around repaying their mortgage; and
- Collecting sufficient management information to establish whether their overall strategy to the maturity of interest only mortgages is working.
The FCA will be monitoring progress closely and providing further assistance to firms where needed.
Martin Wheatley, chief executive of the FCA, said:
"By acting now we are aiming to nip this problem in the bud.
"Mortgage lenders have volunteered to contact their most at-risk customers with a ‘wake-up call’ to highlight the report's findings and what they need to do without delay. We welcome this move and also the sector's commitment to helping its customers try and find a solution - but people must engage with them.
"My advice to borrowers is to not bury your head in the sand – take action now. Understand the terms of your mortgage agreement and take control; work out if you can repay the outstanding amount when your mortgage matures. But you must engage with your lender to discuss how you propose to repay the outstanding loan.
"This is a landmark piece of work and it comes at a critical time: lenders, regulators, and borrowers need to ensure that they grasp the nettle now before it is too late."
The FCA's work is focused on residential interest only mortgages, i.e. where the owner also lives in the property. Buy-to-let mortgages are excluded.
Notes for editors
- There are three peak periods in the future when residential interest only mortgages will mature:
- 2017/2018 – this peak is a result of endowment mortgages sold in the 1990’s and early 2000’s and is typically comprised of individuals approaching retirement with high incomes, high assets and high levels of forecast equity in the property at the end of the term. Maturing mortgages in this peak are concentrated in the South East and South West.
- 2027/2028 - this peak is a result of interest only mortgages typically sold from 2003 to 2009. Maturity starts in 2022, peaks in 2027/2028 and is characterised by less affluent individuals currently in early to mid-life stages. This group has higher income multiples at point of origination, higher rates of ‘converted’ interest only mortgages, lower forecast equity levels and is concentrated in the South West, East, North West, London and the West Midlands.
- 2032 - the final peak is driven by residential interest only mortgages opened from 2005 to 2008 (with higher income multiples and loan to values) and the mortgages converted to interest only terms at some point during the life of the mortgage. There are concentrations of highly indebted individuals with low or negative equity in the property at the point of maturity within this tranche.
- The review consists of two pieces of research. The first is a study by Experian, the credit referencing agency, using data that covers 95 per cent of residential interest only mortgages; this was used to understand the interest only maturity horizons and the characteristics of the near and longer terms loans. The second is a quantitative study of 1,103 interest only borrowers undertaken by market research firm GfK NOP to consider how prepared interest only borrowers are to repay their loans.
- Experian estimates the size of the residential interest only mortgage market as 2.6m; GfK estimates it at 2.3m.
- The FCA’s guidance for firms.
- The GfK study includes modelling: in order to assess the financial risk across the interest-only population, a balance sheet was modelled for each respondent, giving their financial position now and at the time their mortgage matures.
- The Money Advice Service has produced a leaflet on interest only mortgages
- In 2008 the FSA published a discussion paper on consumer responsibility, DP 08/5, which included a section on interest only borrowers.
- On the 1 April 2013 the Financial Conduct Authority (FCA) became responsible for the conduct supervision of all regulated financial firms and the prudential supervision of those not supervised by the Prudential Regulation Authority (PRA).
- The FCA has an overarching strategic objective of ensuring the relevant markets function well. To support this it has three operational objectives: to secure an appropriate degree of protection for consumers; to protect and enhance the integrity of the UK financial system; and to promote effective competition in the interests of consumers
- You can find more information about the FCA, as well as how it is different to the PRA.