Independent review and analysis

Interest only back books

The FSA announced, in the most recent “Retail Conduct Risk Outlook 2012” review, that a thematic review is about to be commenced.  Their concern is that in the medium to long term, the outstanding balances, as well as the LTV percentages of these maturing mortgages, are expected to increase significantly.

It is hoped that the attention drawn to this issue will ensure that in the future both lenders and borrowers pro-actively plan for the maturity of interest only mortgages, and that has already kicked in with various lenders announcing criteria changes to address the problem.

However, that doesn’t help existing customers and with predictions of around 150,000 interest only mortgages maturing in 2012, the issue is significant and will only get worse over the next decade.

Let’s be clear – the only reason interest only mortgages were sold in vast numbers in the first place was to minimise the monthly payments and with lenders themselves relaxing criteria over the past 15 years with regard to repayment vehicles, it is no wonder that customers and mortgage advisers took advantage of that.

The FSA implied at a recent Treasury Select committee that it was “powerless to defuse the interest-only time bomb” and, therefore, it seems that lenders themselves need to come up with solutions. But they have limited options and need to be mindful of their responsibilities to treat customers fairly as well as potential sanctions from the FSA if it considers they have put their own interests ahead of the customers.

It is clear that in the short term there is no easy answer, other than simply extending the loan term and ultimately seeking repayment of capital by a claim on the estate after death. It’s a grim outlook at this point but the mortgage market is adaptable and it is essential a solution is found. We certainly don’t want to see another “retrospective action” situation as happened with endowment mis-selling.


The FSA announced, in the most recent ‘Retail Conduct Risk Outlook 2012’ review, that a thematic review is about to be commenced.  Their concern is that in the medium to long term, the outstanding balances, as well as the LTV percentages of these maturing mortgages, are expected to increase significantly. 

It is hoped that the attention drawn to this issue will ensure that in the future both lenders and borrowers pro-actively plan for the maturity of interest only mortgages, and that has already kicked in with various lenders announcing criteria changes to address the problem.

However, that doesn’t help existing customers and with predictions of around 150,000 interest only mortgages maturing in 2012, the issue is significant and will only get worse over the next decade.

Let’s be clear – the only reason interest only mortgages were sold in vast numbers in the first place was to minimise the monthly payments and with lenders themselves relaxing

criteria over the past 15 years with regard to repayment vehicles, it is no wonder that customers and mortgage advisers took advantage of that. 

The FSA implied at a recent Treasury Select committee that it was ‘powerless to defuse the interest-only time bomb’ and, therefore, it seems that lenders themselves need to come up with solutions. But they have limited options and need to be mindful of their responsibilities to treat customers fairly as well as potential sanctions from the FSA if it considers they have put their own interests ahead of the customers.

It is clear that in the short term there is no easy answer, other than simply extending the loan term and ultimately seeking repayment of capital by a claim on the estate after death. It’s a grim outlook at this point but the mortgage market is adaptable and it is essential a solution is found. We certainly don’t want to see another ‘retrospective action’ situation as happened with endowment mis-selling.

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