The warning comes from the Financial Conduct Authority (FCA) which today (Thursday 02 May) 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 but many borrowers, particularly those whose mortgage is due to be repaid before 2020, will need to take control of their mortgage repayment planning now.
The FCA, the Council of Mortgage Lenders (CML) and the Building Societies Association (BSA) said they 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.
The research found that around 600,000 borrowers will see their mortgage mature before 2020 and about 90% of all interest only borrowers have a repayment strategy, mostly linked to an endowment policy. But just under half of all interest only borrowers are likely to have a shortfall and a third of the shortfalls are expected to be over £50,000.
The FCA said that 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.
Looking further ahead, over the next 30 years, some 2.6 million interest only mortgages will be due for repayment and while 90% have a strategy to repay their mortgage, 10% do not, equivalent to 260,000 people.
There is also concern that some borrowers are underestimating the problem as around a third, 37%, 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 48%.
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.
Some 21% of those expecting a shortfall say they will use savings, 19% plan to downsize to pay off their mortgage, while 15% say they will remortgage.
The vast majority of interest only borrowers, some 81%, say they understood the terms of the loan at the point of sale. But 13% say they did not and another 6% were unsure. However, only 2.5% were both not aware at point of sale and currently do not have a repayment strategy in place.
While most borrowers, 70%, check their annual mortgage statement to ensure they are on track to repay at maturity, about 14% never check.
The average outstanding balance of an interest only mortgage customer is £55,000 for those with an endowment mortgage and £121,000 for those without.
The Financial Services Consumer Panel welcomed the call for early action on interest only mortgages. For many years the Panel has advocated early intervention and pre-emptive action in the face of emerging threats to protect consumers.
‘We are pleased that the new regulator is being proactive in making consumers aware of potential pitfalls and empowering them to take action at an early stage. Interest only mortgages are a useful product when sold correctly and fully understood by those purchasing them. Investigation by the FCA suggests that some consumers with interest only mortgages are likely to find themselves facing a shortfall without a clear repayment strategy. Early intervention by the regulator will help to minimise consumer detriment and has been one of the Panel’s consistent demands,’ said Adam Phillips, Consumer Panel chairman.
The Council of Mortgage Lenders said its members will be stepping up their communications to borrowers with interest only mortgages and want to ensure that all borrowers have sufficient plans to meet their contractual obligation to repay their mortgage when it reaches maturity.
It said that lenders are taking a targeted approach and anyone with an interest only mortgage maturing before the end of 2020 should expect to be contacted over the course of the next 12 months by their lender if they are not already in communication with their lender on this issue about their repayment plans.
The aim is not to force customers to take actions they do not wish to, but to ensure they are aware of their mortgage repayment position, and have an opportunity to take steps that may prove useful to them in avoiding unforeseen payment shocks later.
It pointed out that it is important that customers take action to review their plans when their lender contacts them, as this will minimise the risk of unexpected shortfall problems later and 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 do not wish to do this.
‘Lenders recognise that they have a valuable role to play in helping their customers to plan ahead, and to take action in good time to reduce the risk of being caught short when the time comes for the mortgage to be repaid,’ said Paul Smee, CML director general.
‘We are working as an industry to ensure that good, pre-emptive communication with interest only mortgage customers is the norm. Most people, even if they have not yet done so, have time to plan a satisfactory strategy for when their mortgage reaches maturity,’ he added.
Martin Wheatley, chief executive of the FCA, also urged borrowers to respond and engage with their lenders on how they plan to repay. ‘My advice to borrowers is to not bury your head in the sand. Understand the terms of your mortgage agreement and take control,’ he added.