Skip to content

Concerns voiced that those with interest only mortgages in UK could lose their homes

Home owners in the UK with interest only mortgages are being urged to contact their lender after the Financial Conduct Authority (FCA) found that many have still not discussed their repayment options.

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

As part of a 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, FCA executive director of supervision for retail and authorisations, said that good progress has been made since 2013 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,’ he explained.

‘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,’ he pointed out.

‘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,’ he added.

There are currently 1.67 million 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.

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 and 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.

According to Paul Smee, head of mortgages at industry association UK Finance, the industry understands the need to maintain the progress and the review highlights some areas for improvement, which the industry will take on board.

‘Lenders have already improved communication with their customers and will continue to do so, to ensure that customers looking for the right option at the end of their interest only mortgages get the right advice and support. Lenders also recognise the need to maintain contact with their customers through the life of their interest only mortgages,’ he said.

Anyone who is concerned should contact their lender as soon as possible, according to Jaedon Green, director of product and distribution at Leeds Building Society. ‘It’s in the interests of the borrower and their lender to work together to resolve the situation and achieve the best possible outcome for both parties,’ he said.

‘Many interest only borrowers may have felt deserted by lenders in recent years but more choice has been returning to this market, including wider use of part and part mortgages. Part and part mortgages, where part of the capital balance is interest only, while the remainder is on a capital and interest basis, can offer more flexibility for existing interest only borrowers,’ he pointed out.

‘In cases such as where they have an endowment shortfall, it’s a way they can start to reduce their mortgage debt in a manageable way without the payment shock of switching to a full repayment mortgage,’ he added.