Regulator to investigate interest-only mortgage market
The interest-only mortgage market is to come under the spotlight once again as the regulator investigates whether lenders are acting in the best interests of consumers.
The Financial Conduct Authority (FCA) has today outlined which areas of the market it plans to focus on in the 2017/18 business year.
It will turn its attention to the interest-only mortgage market as many of these loans are due to mature in the next few years. During the term of interest-only mortgage loans, borrowers only repay the interest and then use savings, investments or other assets – known as ‘repayment vehicles’ - to pay off the mortgage at the end of the term.
However, there is a long-running concern in the mortgage industry that many people will be unable to pay back their interest-only loans and that lenders need to offer more support to these customers.
The FCA says many of these loans will begin to expire in 2020.
The regulator says: “Around 1.8 million UK home owners currently have outstanding interest-only mortgages (excluding buy-to-let), and many do not have an appropriate strategy to repay them.
“We will look at how firms treat borrowers whose interest-only mortgages are approaching maturity and their ability to ensure these customers are treated fairly.
“This will include those interest-only mortgages that are due to be repaid by 2020 – where borrowers have the least amount of time to find a solution.”
Once a popular product, interest-only mortgages have all-but-disappeared from the residential market in recent years. This has left many people with interest-only mortgages unable to switch to a new deal.
Smaller lenders, such as Shawbrook Bank, have launched mortgage products targeting these borrowers but mainstream support is still lacking.
A loan in which the borrower pays only the interest on the sum borrowed for the life of the mortgage but, at the end of the mortgage term, they still owe what they originally borrowed as this remains unchanged. The advantage of an interest-only mortgage is the monthly repayment is considerably lower than for a comparable repayment mortgage. Lenders generally insist the borrower also invests in an endowment, ISA or pension savings policy that, on maturity, is intended to pay off the capital loan.
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.