Lenders forcing interest-only borrowers onto capital repayment ‘unfair’
The regulator said lenders needed the agreement of borrowers for such changes. It expressed disappointment at lenders’ attempts to insert terms in contracts which allowed them to unilaterally make the change and said such terms were likely to be unfair under regulation.
The FCA stated: “Sometimes varying the existing mortgage significantly increases the monthly payment (for example, if all or part of the mortgage is changed to a repayment basis), or extends the loan period into retirement. When this happens, we expect a firm to reassess the customer’s ability to afford the revised regulated mortgage contract in line with its written policy.
“So if a firm has the right under the contractual terms of the mortgage to change it unilaterally from an interest-only to a capital repayment basis, we would not expect it to do that unless it has taken reasonable steps to first contact and agree this action with the customer.”
Lenders should consider switching the mortgage to a full, or part, capital repayment basis, extending the mortgage term, accepting overpayments or a combination of these strategies to help struggling interest-only borrowers, according to the guidelines.
Repossession should be a last resort and firms needed to show they had discussed alternatives with the customer before taking such action, it added.
Good practice recommendations included a written strategy for dealing with interest-only borrowers, assigning a dedicated team interest-only and offering struggling borrowers realistic options.
Bad practice highlighted by the FCA included telling the borrower the loan and reached its end date after the end date had passed, failing to warn customers about the need to have a suitable repayment vehicle and using staff only trained in mortgage arrears handling.