The long awaited thematic review in interest only mortgages has now been published by the new regulator The Financial Conduct Authority. The Authority has asked mortgage lenders to check whether interest only customers could pay back their loans, and issue guidance of what they should do if they haven’t a repayment vehicle in place. The FCA estimates that there are 2.6 million interest only mortgages due for repayment over the next 30 years with 10% of these people having no repayment plan in place. About half of the 2.6 million are estimated to have savings but will have average short falls of £72,000. The regulator is grasping the nettle now as they are concerned that unless they do so mass evictions could soon follow, with half a million people having interest only mortgages that mature before 2020. So they have instructed lenders to make contact with these borrowers in an effort to sort out their problems.
I think that the lender, on making contact and having established a shortfall, will try and convert the borrower’s mortgage to a repayment plan. I believe that if the mortgage holder is unable to meet these repayments then further negotiations will take place. This will be to try and make the mortgage affordable. This could include stretching the term, or being advised to remortgage to another lender, if they are for example with NatWest, who cannot extend mortgages past age 70. Whereas some lenders in certain circumstances can extend plans to age 85.
If affordability still remains a problem then perhaps equity release could be an option. This could mean money being raised on a lifetime mortgage to pay off the existing mortgage and keep the borrower in their home. However, there are some problems with this type of mortgage in that lenders only tend to advance relatively low percentage to value mortgages, and these figures may not be enough to discharge the mortgage. Also, although in most cases payments need not be paid on these plans, the underlying interest rate is a lot higher than most conventional mortgages.
However, all of the above do at least give a lifeline to hard-pressed borrowers, with interest only mortgages. But what if the borrower wants to stay in their property and can’t afford a payment plan but can afford an interest only mortgage, can they not continue as before? Officially lenders have been taking a hard line in this area by saying that borrowers who do not pay off their mortgages at the end of the term are in breach of contract. Yet, I get the feeling that FCA getting involved and citing one of their core principles of treating customers fairly, it is initially possible that lenders will feel that they may have to modify their behaviour. I also think that they may even bring out new products to deal with this troublesome area of lending.
The Thematic Review is a call to action to all interest only borrowers with no repayment vehicle who do not wish to down size. So rather than wait for contact from your lender it could be worthwhile contacting an IFA who specialises in mortgages to outline the current range of options open to you.
Kieron Bassett Financial Services has two Independent Financial Advisers who specialise in mortgages and investment advice. Contact us on (01524) 832057, via e-mail, info@kieronbassett.com, or visit www.kieronbassett.com.
Kieron Bassett DipPFS
13th May 2013
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