FCA launches working group to probe interest-only mortgages

The Financial Conduct Authority is working with 12 lenders and administrators to probe the interest-only mortgage market.

The number of IO and part-and-part mortgages, as at the end of 2022, has reduced to just under one million compared to two million in 2015. This number has reduced more quickly than anticipated and indicates those borrowers had better than expected repayment strategies or have been able to move onto a repayment mortgage.

Whilst the number of interest-only mortgages has reduced faster than expected, the FCA insists the challenge remains for a significant number of borrowers.

This isn’t the first time the FCA has looked at the issue. Back in 2013 its research identified three peak periods for IO maturities - 2017/18; 2027/28 and 2032. In response, it introduced detailed guidance to the industry on dealing fairly with IO mortgage customers who risk being unable to repay their loan. 

Its latest market research shows that the overall picture for recent IO maturities appears better than previous projections, with the overall number of IO mortgages reducing at a faster rate and many borrowers able to repay their loans at maturity or shortly afterwards.

But concerns remain about the preparedness of some borrowers for the next phase of maturities, the options they will have if they cannot repay the capital at maturity, and the impact this could have on them. The research confirmed a significant peak of maturities in 2031 and 2032.

A statement from the authority says: “Most IO borrowers will be able to repay the capital owed in full at maturity either using savings, investments, pensions, sale of property or changing to a different type of mortgage. Where taking out a different type of mortgage, such as a lifetime mortgage or retirement interest-only mortgage, as a means of paying off the IO mortgage it is important to ensure this is sustainable and affordable.

“However, borrowers currently projected to be unable to repay in full need support. Our consumer research indicates that some IO borrowers may be over-estimating their ability to repay. The research found 82 per cent were confident about repaying, yet 36 per cent expected to have a shortfall.”

The members of the working party are: FCA; Santander UK; Lloyds Banking Group; Barclays; Nationwide Building Society; Topaz; Landmark; Skipton; Coventry Building Society; Kensington; Accord; The Family Building Society; and Pepper UK.