UK regulators have told Britain’s banks to step up checks on 1.7m customers with interest-only home loans who in many cases have no clear plan for repaying capital.
The Financial Conduct Authority (FCA) said banks and building societies are contacting customers, but a review of the market showed some clients were reluctant to take action. Regulators called the interest-only mortgage market a “ticking time bomb” in 2012 after it helped to fuel a housing boom ahead of the 2007 to 2009 financial crisis.
A customer pays only interest until the loan’s term ends, when the capital must be repaid. Such loans helped people buy a home that they otherwise could not have afforded with a traditional loan that starts to repay capital from the beginning.
Now far less common in new mortgages, one in five home loans outstanding in Britain are interest-only, many with shortfalls in repayment plans. In 2013, an FCA review set out recommendations to deal with “peaks” in maturing loans in 2027-2028 and 2032, when customers will have to pay back the capital.
“Since 2013 good progress has been made in reducing the number of people with interest-only mortgages,” Jonathan Davies, FCA executive director of supervision, said in a statement.
“However, 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,” he said.
Paul Smee, head of mortgages at UK Finance, the industry body that represents home loan lenders, said the FCA’s review showed good progress by the sector, with some areas for improvement.
The FCA has reviewed the sector for a second time, looking at 10 lenders who represent about 60% of the market. It said there are currently 1.67m full interest-only and part capital repayment mortgage accounts outstanding in Britain, or 17.6% of all home loans.
Meanwhile, Britain’s housing market lost momentum last month as lenders approved the fewest mortgages in nearly three years following the Bank of England’s first interest rate hike since the global financial crisis. At the same time, lending to consumers
- something the Bank of England is watching closely -
sped up for the first time in four months. Britain’s economy lagged behind stronger growth in much of the rest of the world last year as the rise in inflation triggered by June 2016’s Brexit vote and weak wage growth ate into households’ disposable income.