Warwick Business School professor Daniel Read said lenders had to contend with peoples’ in-built “excessive irrational optimism”.
He said borrowers would have limited time to look at options: “Mortgages are also complex instruments, and comparing several can become quite confusing. I therefore don’t believe that giving people ‘all the options’ is in any way protecting their interests, but only giving the appearance of protection.
“In an ideal world, lenders would be sensitive to the needs of borrowers, and provide a few options that fit with those needs.”
Giving borrowers good advice at the start was better than offering them lots of options, he added.
Banks and building societies needed to personalize their communication with interest-only borrowers in order to be effective, he said: “Also, there can’t be a list of possible courses of action, just one course of action.”
If lenders asked borrowers to increase monthly payments by £50 it could help them get into the habit of paying more, he said. Lenders could later raise the monthly amount further: “It really has to be giving them an action to help them out.”
Mortgage lenders should not waffle but make their communication brief, he added: “They should use norms as well, for example; 60% of people in your situation are doing this.”
Read compared interest-only borrowers to library borrowers, who might delay the hassle of bringing back an overdue book because the fine was small, even if the total cost could become huge.
In the Financial Conduct Authority’s August interest-only lending and borrower guidance, the regulator warned against unilaterally moving borrowers onto repayment mortgages without the customer’s permission.
