FCA seeks fair treatment of interest-only mortgage borrowers

Regulator reminds homeowners of their responsibilities in paying off capital, but wants fair treatment from lenders

Homeowners with interest-only mortgages who do not have enough money to pay them off when they mature have been warned it is ultimately their responsibility to find a way to clear their loan.

However, the Financial Conduct Authority (FCA) added that it expected mortgage lenders to treat these customers fairly and not "exploit" those in difficulty by, for example, demanding they pay a higher rate of interest than other customers. Repossession of a property should be "a last resort".

With an interest-only mortgage the borrower agrees to pay off the interest each month but makes no capital repayments. Borrowers are typically expected to have an investment plan in place to pay off the debt at the end of the term – but not everyone does.

In May 2013 research published by the FCA found that up to 2.6m interest-only mortgages will mature by 2041. However, it concluded that almost half of these people – up to 1.3 million homeowners – may be unable to repay the loan at the end of the term and faced an average shortfall of more than £71,000.

The figures fuelled fears that some of those left with a big bill could end up losing their home or having to keep making monthly mortgage payments into their old age.

In new guidelines issued to banks and building societies on dealing with existing interest-only customers who find themselves in difficulty, the FCA said it recognised that "customers are responsible for repaying their loans [and] repayment of the capital at the end of term is a contractual requirement".

Furthermore, it added that lenders were not required to offer a helping hand to struggling borrowers. Banks and building societies "are not obliged to offer options at maturity" such as extending the mortgage term to give someone more time to pay what they owe, but they should consider what they can do to help or provide a breathing space, it said.

The regulator has previously indicated that in cases where people were unable to repay their debt, lenders were often extending the mortgage term at the same time as switching the loan over to a repayment basis – suggesting that many people could end up having to keep making payments for many years.

FCA guidance states that firms "must pay due regard to the interests of its customers and treat them fairly", which could include writing to affected customers "early and frequently".

It said some interest-only customers may be "trapped" in that they are unable to change their mortgage or move to another lender, and that in such cases banks "should not unfairly charge them a higher rate of interest than other customers to exploit the fact that they are unable to exit the mortgage".

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