The City regulator has sounded an alarm about the “significant numbers” of people with interest-only mortgages who may be in danger of losing their homes.
The Financial Conduct Authority (FCA) said many interest-only borrowers could face a shortfall in terms of what they owed, and some were avoiding talking to their mortgage lender because they “didn’t want to confront their situation”.
There have been a series of warnings about this type of home loan in recent years, fuelling fears that some of those left with a huge bill could end up being repossessed.
In 2013 the FCA - whose former boss previously labelled interest-only mortgages a “ticking timebomb” - revealed that about 1.3m homeowners with such mortgages may not have enough money to pay off their home loan when it is due for repayment and face an average shortfall of more than £71,000.
The FCA said good progress had been made since then in reducing the numbers of people with these mortgages, but added: “We are very concerned that a significant number of interest-only customers may not be able to repay the capital at the end of the mortgage and be at risk of losing their homes.”
With this type of home loan, the borrower agrees to pay off the interest each month but makes no capital repayments. Borrowers are expected to make sure they have an investment plan in place to pay off the debt at the end of the term. However, some people are facing a shortfall because their investment has underperformed, while others never set anything up.
There are currently 1.67m part- and full interest-only mortgages outstanding in the UK, with about 85,000 due for repayment this year.
The FCA said the next two maturity “peaks” were in 2027-2028 and 2032, and included less affluent individuals.
The regulator said many lenders were reporting that, even though borrowers were being sent letters, “customer engagement rates are low”. It emerged that some lenders have even resorted to sending staff to knock on customers’ doors. However, in some cases the letters sent out by banks and building societies had “a lack of clarity and purpose”, which led to some customers not understanding the importance of the communication.
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