HOMEOWNERS with interest-only mortgages are facing a “wake-up call” after a regulator warned that up to half of these borrowers will not have enough money to pay their loans back.
The Financial Conduct Authority (FCA) fears that consumers are underestimating the scale of the problem, with around 260,000 people thought to have no strategy in place for repaying their loan.
Interest-only mortgages allow borrowers to pay off the capital only when the mortgage term ends, enabling them to maximise their borrowing capacity.
Consumer campaigners also raised concerns that a “significant” number of people claimed to be unaware how their loan was meant to be paid back when they took the product out and called for further work to make sure some borrowers were not missold deals.
Mortgage lenders have agreed to alert their most at-risk customers to help them avoid “payment shocks”. Some of them could end up having to sell their home to pay the loan back.
Around 2.6 million interest-only mortgages are due for repayment over the next 30 years but research has revealed that one in ten people on such a deal has no plan for paying the money back.
The FCA report found some 13 per cent of interest-only borrowers claimed they were not aware when they took out the deal that they needed a plan in place to repay the whole amount borrowed, not just the interest – and a further 6 per cent were unsure.
Richard Lloyd, executive director of consumer group Which?, said: “We hope the FCA looks into this further to establish whether lenders made it completely clear to interest-only borrowers that they would need a repayment plan, to be sure there wasn’t widespread misselling.”
The FCA said that the regulator was concentrating its efforts on making sure that the people whose interest-only mortgages are maturing will have a way of paying their loan back.
A Council of Mortgage Lenders (CML) spokeswoman said that the body’s focus will be on helping those who have no strategy for repayment.
The FCA’s findings will step up the pressure on lenders to increase their communications to borrowers. The focus will be on people whose mortgages are set to finish before the end of 2020.
The Building Societies Association (BSA) and the CML are working to contact borrowers.
Around one-third (37 per cent) of interest-only borrowers said they may not have enough cash put by to repay their loan, although projections compiled for the FCA suggest this figure may be closer to 48 per cent.