Consultant Zone

Interest only – has inertia set in?

We have commentated on this topic several times before and undoubtedly some progress has been made by lenders, but recently mortgage portfolio trades have contained large proportions of interest only loans and there has also been a renewed focus by the FCA.

Despite some commentators suggesting that this issue is a low risk one, the scale of it remains; there are currently 1.67m interest-only and part capital repayment mortgages outstanding, representing nearly 18 per cent of all outstanding UK mortgages. The FCA has again warned that “the many interest-only mortgage borrowers who have not arranged a repayment plan need to speak to their lenders as soon as possible, or risk losing their homes”.

Since the FCA’s review in 2013 it has been trying to identify why nearly 70% of customers had failed to engage with lenders. Its findings can be summarised into 3 categories; confident customers did not make contact because they already had strategies in place and had other sources of financial guidance. More constrained customers knew their options were limited but wanted to retain their current flexibility and finally, some customers felt they had no options and were reluctant to confront the situation.

We have undertaken several projects to review different customer contact strategies and our experience shows that a more personalised approach improves engagement. Providing a clear rationale or incentive for a borrower to respond, such as suggesting other repayment options or offering a more relaxed approach that is not seen as threatening by the borrower, results in improved response rates.

Finally, on mortgage portfolio trades, this issue can prove to be a significant risk for any potential buyer if documented customer contact strategies are not in place. The extent of that risk needs to be identified as early as possible at the review stage. Rockstead’s 10-year experience in reviewing mortgage portfolios and assessing risks that may not be immediately apparent to a purchaser, will prove invaluable. Please get in touch if you wish to discuss this matter further.