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May 2, 2013 12:09 am
The new UK financial regulator has taken its first “pre-emptive” action after discovering that almost half the UK’s 2.6m interest-only borrowers risk being unable to repay mortgages.
The Financial Conduct Authority waded in to the market for interest-only mortgages – loans sold in abundance throughout the housing boom that do not require borrowers to make capital repayments every month – amid fears that they could lead to mass evictions when the loans came due.
It concluded on Thursday that up to 1.3m homeowners with mortgages due for repayment over the next 30 years faced shortfalls averaging about £72,000. Up to 10 per cent had no plan to repay their debts.
Rather than wait for the bills to come due and complaints to start, the FCA has asked lenders to contact their most at-risk customers – those whose loans are due to be repaid before the end of 2020 – within the next 12 months to help them find ways to address the shortfall.
It has also issued proposed guidance for lenders on how they should treat interest-only borrowers who risk being unable to repay loans. Some customers may be offered loan extensions, while others may be moved on to plans that include capital repayment.
“This is a different way of approaching what regulation can do,” said Martin Wheatley, who heads the FCA. “We are trying to avoid a problem in 2020 where the banks have to either write off the debt or kick someone out of their home.
“It is better all around. The banks don’t want us hitting them on the head [with enforcement penalties] and people don’t want to lose their homes,” he added.
The FCA stopped short of intervening more heavily into the market, Mr Wheatley said, because it did not find evidence of mass mis-selling. However, 13 per cent of borrowers told the FCA they did not understand the terms of the loans they were sold, and 2.5 per cent, equivalent to about 65,000 homeowners, said they were unaware of the terms and do not have a repayment strategy.
“This is not one of those complex products. It is what it says on the tin,” Mr Wheatley added, saying it bore no resemblance to the payment protection insurance mis-selling scandal.
The FCA research also revealed that the scale of the problem was not as big as initially feared. Earlier analysis showed that in 2007 – the peak of the housing boom – one in three new loans was sold on an interest-only basis and almost 75 per cent of those had no reported repayment plan.
Thursday’s research found nine out of 10 had a strategy to repay their mortgage – although half of all borrowers would still have a shortfall.
It estimates that 260,000 consumers do not have a way to repay their capital.
New stricter rules on the selling of interest-only mortgages which come into force next April are aimed at stopping a repeat of these problems. Experts say interest only is now a niche product, with many of the UK’s biggest lenders no longer offering them. The number of interest-only loans advanced has fallen from more than 330,000 in 2007 to about 38,000 last year.
Interest-only mortgages were popular throughout the housing boom as a way to maximise the amount that homebuyers could borrow. Paying just the interest on loans typically knocked hundreds of pounds off monthly repayments, making them popular with first-time buyers and buy-to-let landlords.
The FCA’s research has identified three peaks over the next 30 years where large numbers are due to be repaid – the first in 2017-2018. These are mostly endowment mortgages sold in the 1990s and early 2000s. These borrowers have lower shortfalls and are typically individuals approaching retirement with high incomes, high assets and high levels of equity, the FCA said.
The next two peaks occur in 2027-8 and 2032 and are characterised by less affluent individuals with higher debt levels. However, as these borrowers have more time to repay, the FCA believes that most homeowners should be able to find a way to pay off their mortgage if they act now and discuss options with lenders.
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