And the FCA warned the industry not to limit itself to a narrow range of forbearance options.
The regulator emphasised the potential risks for second charge borrowers in a dedicated section of its proposed guidance on the extension of payment deferrals.
It highlighted that firms in this sector should be mindful as there was a particular risk of harm from the total debt escalating significantly when a customer defers payments or enters payment shortfall, particularly compared to what they would otherwise have paid.
“Where normal payments are significantly disrupted for a material period of time this can mean customers struggle to repay the total amount owed,” it said.
“This is driven by the combination of relatively high interest rates adopted by some firms in this market, and that where interest is charged on sums in arrears, it is typically applied on a compound basis.”
Unlimited forbearance options
As a result, the FCA said it was particularly important firms considered using a range of forbearance options and not limit option to only those listed in the Mortgage Conduct of Business sourcebook.
“These could include applying simple interest rather than compound to any payment shortfall, or reducing the interest rate charged on these sums, in some cases to 0 per cent,” the FCA continued.
“This, when combined with sustainable arrangements to pay, may prevent the balance from escalating to a point where the customer is unlikely to be able to repay the total amount owed, and give borrowers more scope to effectively address any shortfall.”
The regulator added that customers who have benefitted from payment deferrals will be at particular risk of harm, as the deferrals will have disrupted payments under their mortgage.
And they may also have taken payment deferrals for their first charge mortgage which could have worsened their indebtedness.