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Interest-only: Paving the way for another mis-selling scandal – JLM

by: Rory Joseph is director and Sebastian Murphy is head of mortgage finance at JLM Mortgage Services
  • 12/03/2018
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Interest-only: Paving the way for another mis-selling scandal – JLM
The much-used phrase ‘interest-only timebomb’ appeared to be less in use recently, however judging by the Financial Conduct Authority’s (FCA) latest missive, there is real cause for concern.

This should not be a shock to the industry, but many borrowers appear to need a little shock of their own to acknowledge the scale of the problem they could be facing.

The regulator said interest-only borrowers are risking losing their homes if they do not confront how they are going to pay off their capital at the end of their mortgage term.

It also said letters from lenders about this matter are being ignored which means when the final bills are delivered, large numbers of borrowers will either not have a repayment vehicle in place to pay it off, or the savings will not be enough.

The end result of this could be catastrophic and pave the way for another mis-selling scandal.


Not just a niche problem

Warnings from the regulator don’t get much more targeted than this.

Given the 1.67m interest-only/part-capital repayment mortgages outstanding in the UK, it’s clear we’re not just looking at a niche problem within the mortgage market.

The good news is that the peak time when interest-only mortgage terms will end is over the next 10 to 14 years, meaning there is some time for borrowers in such a situation to start doing something about it.

But, given there is a tendency for such borrowers to bury their heads in the sand when it comes to dealing with these issues, it’s clear the regulator is going to be calling upon mortgage lenders in particular to do much more communication work.


Disenfranchised customers

However, the FCA also stressed a large number of these borrowers are disenchanted with financial services and, for that reason, were likely to ignore any letters that had been sent through.

Clearly this is a poor move on their part, but if lenders cannot be in the driving seat when it comes to helping such customers, then perhaps advisers could, or indeed should, be taking the lead.

The prominent issue in this is of course the time available to borrowers who have interest-only loans.

In our experience, many believe there are simply no options for them and are more than happy to kick the problem into the long grass for the duration.

What we have to do as an industry is to make the communication, outline the problem and its potential consequences, and also ensure they know there are solutions available to them.

But time is of the essence here and the longer they put off action, the more complex and damaging the problem could become.


Lucrative opportunities

There is further good news – and it perhaps helps restore consumer confidence – in that lenders are minded to be flexible when it comes to such borrowers.

Moving to a repayment option, remortgaging, or looking, for example, at the interest-only options available for older borrowers, are all potential solutions.

But advisers need to make their clients aware that such options are not going to suddenly appear as if by magic.

With almost one in five UK mortgages being interest-only, it is not surprising the FCA is expressing concern about the level of inaction by borrowers.

One suspects it will continue on message when it comes to ensuring customers are aware of the consequences, but advisers clearly have an important (and potentially lucrative) role to play here in ensuring interest-only does not end in disaster for these people.

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