Out-Law News | 30 Aug 2013 | 2:54 pm | 2 min. read
The FCA has set out new guidance for mortgage providers (21-page / 184KB PDF) on how to deal with borrowers who cannot afford to pay the capital that is owed at the end of interest-only mortgage terms.
Interest-only mortgages are deals offered by mortgage providers to house buyers which enable those borrowers to pay back interest on their loan only for a set period before the obligation to repay the actual capital being borrowed kicks-in. Interest-only mortgages were widely available prior to the financial crisis but, following a period during which many providers stopped offering such loans, some lenders have begun offering deals on interest-only mortgages again recently.
The FCA said that although it recognises that customers are responsible for repaying loans and that mortgage providers are not "obliged to offer options" to customers who may struggle to repay the capital on interest-free mortgages "at maturity", it said that mortgage providers are required, under FCA principles for businesses rules, to pay due regard to customers' interests and treat them fairly.
Therefore, interest-only mortgage providers should "consider what options they are able to offer customers who find themselves unable to repay the capital at the end of the term or express to the firm that they may be unable to do so," the FCA said. It said the lenders should "be able to demonstrate the options they have considered and why certain options are not being offered (if applicable)".
Some of the options interest-only mortgage providers could provide to customers to comply with their regulatory duties include switching customers' interest-only mortgages "to a full or part capital-repayment basis", the FCA said. Alternatively, allowing customers to extend the term of the mortgage to incorporate a switch to a different kind of mortgage, repay the capital or sell their property could also help providers comply, it said.
The regulator advised mortgage providers to have written strategies in place to account for situations where customers have not or may not repay capital. It said they should "give customers enough time to consider the pre or post-maturity options available to them (including any specific eligibility criteria) or to make alternative arrangements".
"For customers who have received early communications highlighting the need to take action (for example, ten years before maturity), lenders should make it clear what options are likely to be available at maturity," the FCA said. "We recognise that certain options available to customers earlier in the process may not be available closer to maturity and, if so, clear early warnings should be provided."
The FCA also warned mortgage providers about the need to comply with consumer protection rules set out under the Unfair Terms in Consumer Contracts Regulations. Those rules mean that companies cannot rely on terms in consumer contracts that are unfair.
Even if a mortgage provider has the right to unilaterally change the terms of agreements on interest-only mortgages and elects to do so in the event that a customer cannot repay capital at the end of a term, the regulator warned that they must not charge "trapped" customers a higher rate of interest than other customers in order to "exploit the fact that they are unable to exit the mortgage".
"We were disappointed to see during our thematic review, in some examples, terms in contracts provided firms with the right to unilaterally (in other words, independently of a customer’s agreement to the change) convert mortgages from interest-only to a repayment basis with no understanding of customers’ ability to repay," the FCA said. "We consider such terms are likely to be unfair under the regulations."
In its guidance the FCA further stressed the importance of written guidance being made available to staff working for interest-only mortgage providers, of the need for consistent treatment of customers, and for staff training and monitoring in relation to how they deal with interest-only mortgage customers.