Regulator to ensure mortgage lenders treat interest-only borrowers fairly

In the early to mid-2000s, thousands of borrowers took out interest-only mortgages. Now, with many of these loans approaching maturity, the regulator has confirmed that it will monitor how lenders are treating these borrowers to ensure they are dealt with fairly.

Hundreds of thousands of borrowers expected to face an interest only shortfall

Before the global financial crisis, interest only mortgages were commonplace. Many borrowers elected to take out an interest only deal in order to reduce their monthly mortgage repayments, often with no clear idea of how they would repay the capital at the end of the term.

Now, the UK regulator has confirmed that it will look at how lenders are treating interest-only mortgage customers whose mortgages are approaching maturity. The Financial Conduct Authority (FCA) made the announcement in its business plan, saying: “Around 1.8 million UK homeowners currently have outstanding interest only mortgages (excluding buy-to-let), and many do not have an appropriate strategy to repay them. We will look at how firms treat borrowers whose interest-only mortgages are approaching maturity and their ability to ensure these customers are treated fairly. This will include those interest-only mortgages that are due to be repaid by 2020 – where borrowers have the least amount of time to find a solution.”

The FCA estimates that 600,000 interest-only mortgages will mature before 2020 and just under half of these borrowers are expected to have a shortfall. Around a third of these shortfalls are expected to be more than £50,000.

Could many older borrowers be forced to sell their homes?

One of the problems facing many interest only borrowers is their age. Many will find it hard to take out a further mortgage due to ‘maximum age’ restrictions on new mortgages, while others will find themselves too young to take advantage of equity release schemes.

This may mean that thousands of borrowers are forced to sell their homes or use their savings/pension to repay the money they owe.

Research by over-60s property experts Homewise has found that one in 10 UK homeowners over the age of 55 are still paying interest-only mortgages, with 17% of them admitting they will be unable to clear the debt.

Dean Mirfin, technical director at Key Retirement, welcomed the FCA’s decision to monitor the treatment of these borrowers, but warned that many could end up selling their homes when they don’t have to: “There are some good examples now of lenders making positive efforts to support and signpost their maturing IO customers who they otherwise cannot help. One example being that of Santander who are already referring customers with interest only loans for equity release information and advice as a potential solution and we would urge other lenders to follow their lead.

“Where lenders have no solution to offer they must have a duty of care to customers of letting them know all their options, be that mortgage or equity release solutions from the wider market. It is essential, for this first wave of maturities, that banks and other lending institutions take action sooner than later, these customers are the most vulnerable as they have little time to act.”

Everything you need to know about interest-only mortgages