FCA urges action on interest-only mortgages

Nearly one in five mortgage customers have an interest-only mortgage and the FCA is concerned that shortfalls in repayment plans could lead to people losing their homes.

As part of its thematic review into the fair treatment of existing interest-only mortgage customers the FCA found that, although mortgage lenders are writing to customers prior to their mortgage maturing, engagement rates with firms are low.

The FCA review covered 10 lenders who represent around 60% of the interest-only residential mortgage market and looked at how lenders are treating these customers to help ensure their mortgages are repaid at maturity. 

Jonathan Davidson, Executive Director of Supervision – Retail & Authorisations, said:

“Since 2013 good progress has been made in reducing the number of people with interest-only mortgages. However, we are very concerned that a significant number of interest-only customers may not be able to repay the capital at the end of the mortgage and be at risk of losing their homes.”

“We know that many customers remain reluctant to contact their lender to discuss their interest-only mortgage for a variety of reasons.  We are very clear that people should talk to their lender as early as possible as this will give them more options when it comes to the next steps they can take.”

“We are encouraged to see that lenders have taken positive steps to engage with and help their interest-only customers. However, as the number of maturities start to increase towards 2032, it is important that lenders take time to review and, where possible, improve, their own strategies.”

There are currently 1.67m full interest-only and part capital repayment mortgage accounts outstanding in the UK. They represent 17.6% of all outstanding mortgage accounts and over the next few years increasing numbers will require repayment (see notes for editors).

The FCA found that lenders are actively trying to communicate with their customers to understand repayment strategies and to provide appropriate and affordable solutions where needed. However, for most lenders, the engagement is based on writing to customers at specific times before maturity. Where lenders tailored their work to the different customer types identified, they were able to increase contact with those considered higher risk.

The FCA also found that, although lenders were recommending repayment options that appeared appropriate for those customers who made contact and that the harm of repossession due to non-repayment was reduced, the processes which customers had to follow were, on many occasions, challenging. This included delays in getting to speak to advisers, making multiple phone calls and repeating information previously provided.

In 2013 the FCA identified three residential interest-only mortgage maturity peaks. The first peak, happening now, is likely to have more modest shortfalls due to the profile of customers typically being those who are approaching retirement with higher incomes, assets and levels of forecast equity in their property at the end of term. The next two peaks in 2027/2028 and 2032 include less affluent individuals who had higher income multiples at the point of application, greater rates of mortgages converted from repayment to interest-only and lower forecast equity levels; the FCA is concerned that they are more at risk of shortfalls. 

Alongside the thematic review the FCA has also published consumer research about why customers are failing to talk to their lender about their interest-only mortgage. This is aimed at assisting lenders in building a greater understanding of why customers may not be making contact.

A leaflet highlighting the benefits to customers[1] of talking to their lender as early as possible has also been released.

Notes to editors

1. Read the review: TR18/1[2].
2. Review the 2013 guidance: FG13/7[3].
3. The FCA commissioned Kantar Public to conduct customer research to understand why some customers are not engaging with their lender about their interest-only mortgage. The findings of Kantar Public’s customer research[4] will also be published today.
4. The number of full interest-only and part capital repayment mortgage accounts was taken from the mortgage lenders and administrators return (MLAR) H1 2017
5. The FCA is due to publish an interim Mortgage Market Study[5] in 2018.
6. The FCA published a quarterly consultation paper[6] in September 2017 which includes retirement interest-only mortgages.
7. The FCA’s Financial Lives 2017 research identified that 70% of all interest-only and part capital repayment mortgages are held by customers aged over 45. The FCA published its Financial Lives survey[7] in October 2017.
8. The FCA published a news story[8] in 2013, which provided information and links to other sites to help interest-only customers.
9. This review looked at the management of the interest-only “back book” and has not considered new mortgages arranged since the introduction of new rules following the Mortgage Market Review (MMR) in April 2014.
10. On 1 April 2013, the 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).
11. 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.
12. Find out more information about the FCA[9].