Interest-Only Mortgage Alert in U.K. Downgraded to Wake-Up CallBen Moshinsky
The U.K. financial regulator backed off warnings that interest-only mortgages were a “ticking time bomb,” saying most borrowers can repay the loans.
Britons who took out the loans during the property boom and don’t have enough savings to repay the principal still have relatively high incomes and equity in the property, the Financial Conduct Authority, the U.K.’s markets and consumer finance regulator, said in a report today.
The regulator has tightened mortgage-lending rules since the 2008 U.S. subprime-lending crisis, banning interest-only mortgages when the borrower is betting on rising house prices to repay the loan. Around two of every five U.K. mortgages are interest-only, a product where borrowers pay no principal on the actual loan.
“It is reassuring that the regulator’s findings echo our own, and suggest that the majority of interest-only customers are both aware of their repayment obligations, and have at least a reasonable plan about how they expect to repay their loan,” Paul Smee, director general of the Council of Mortgage Lenders, said in an e-mailed statement.
Martin Wheatley, the head of the FCA, told lawmakers last year that the mortgages were a “ticking time bomb.” Today, he said banks that offered the loans maturing by 2020 must send customers “a wake-up call” reminding them to make a plan for repayment.
“By acting now we’re aiming to nip this problem in the bud,” Wheatley, the London-based FCA’s chief executive officer, said in an e-mailed statement. “Mortgage lenders have volunteered to contact their most at-risk customers with a wake-up call to highlight the report’s findings and what they need to do without delay.”
Of the 2.6 million interest-only borrowers who must repay their mortgage in the next 30 years, around 10 percent don’t have a strategy to meet their obligations, according to the research. One in seven don’t check their yearly mortgage balance, the FCA said.
Around 100,000 people that borrowed money on an interest-only basis will have to pay it back within seven years and are likely to have a shortfall of more than 50,000 pounds ($78,000), the FCA said.
The FCA will require lenders to have written policies outlining how they will deal with at-risk interest-only mortgages, train their front-line staff on how to advise borrowers and give customers enough time to consider all their options for repayment.
The FCA’s research found that around 21 percent of borrowers planned to use savings to pay off the loan, while 15 percent plan to remortgage their property.
The report shows an improvement in the awareness of interest-only mortgage consumers. About 78 percent of the borrowers had no repayment strategy in the third quarter of 2011, according to a previous FSA survey.
The FCA began operations on April 1, taking over market abuse and consumer finance enforcement duties from the FSA, which was phased out by lawmakers who blamed it for failing to prevent the financial crisis in 2008 which saw the collapse of Northern Rock Plc and left Royal Bank of Scotland Plc needing a 45.5 billion-pound government bailout.
The regulations reining in interest-only mortgages also require lenders to assess the impact of rising interest rates in their mortgage-approval calculations.
The Bank of England has kept benchmark interest rate at a historic low of 0.5 percent since March 2009 to counter the effects of the global financial crisis.