Interest-only borrowers could become an industry crisis from around 2030 if mortgage holders do not put plans in place to repay the underlying capital on their loans, the regulator has warned.
Lenders have been urged to improve communication with these borrowers so that when deals mature over the next 15 years, there is minimal risk of repossession.
The watchdog is worried that many customers are not responding to providers when asked for more information about interest-only loan repayment plans.
Borrowers who don’t consider their options now, are more likely to end up losing their home later, the FCA today said after a thematic review of interest-only mortgages.
FCA executive director Jonathan Davidson said: “We’re not at a crisis now… We can avoid a crisis in 10-15 years’ time, if we can get lenders to take action now.”
At the moment cases of repossession are few and far between – in the FCA’s sample of 164 interest-only mortgages, only one was repossessed.
But the risk is growing due to the types of borrowers on deals set to mature further down the line, according to Davidson.
He said: “One of the biggest risks is that customers get to end of term and get repossessed… Banks are motivated to do the right thing, but the issue is about shortfalls – the risk is only going to increase because of the nature of the credit conditions.”
No lender wants to repossess
The FCA found that once borrowers were in contact with their lender, they were being treated fairly – with providers looking to provide a number of repayment options.
Davidson said: “Lenders are doing a good job and they are keen to make this work – no lender wants to repossess.”
But many customers don’t take action after being approached by their bank or building society because they simply mistake letters for marketing material or information gathering.
Davidson said lenders are not stressing the importance of getting repayment plans sorted sooner rather than later – and providing more specific options in communication for their customers could increase response levels.
Providers should also make the route for borrowers to engage easier because at the moment the onus is on the borrower to keep phoning and repeating information to contact centre staff.
He added that brokers could play a part by contacting their interest-only clients and helping them to look at their options – and lenders should consider signposting advice in communication.
Intermediaries will always be a good option for borrowers worried about talking to their lender, Davidson said.