New Callcredit white paper explores the interest-only mortgage 'timebomb'
Lenders should take proactive steps to engage with borrowers who are facing an interest-only mortgage 'timebomb', according to a new white paper from Callcredit Information Group.
The white paper - Interest Only Residential Mortgages: What happens when the music stops? - looks at the financial difficulties that borrowers may face when their mortgage reaches maturity. It explains that nearly two million interest-only mortgages will mature in the next 20 years, but many borrowers do not have sufficient repayment strategies in place.
Written by Juliet Coukham, director of retail lending strategy at Callcredit, and risk consultant Nick Royston, the white paper explores how interest-only mortgages have evolved - from their peak in the 1980s, when they were commonly sold alongside endowment policies, to the post-credit crunch era, when struggling borrowers typically switched from repayment to interest-only plans in order to reduce their outgoings. In many of these cases, borrowers are now facing a shortfall either due to an underperforming endowment, or by not having a sufficient alternative repayment plan.
However, Coukham and Royston explain that lenders who engage with these borrowers at an early stage have a greater chance of a positive outcome than those who don't. They suggest lenders could use affordability and credit risk models to identify those at risk and offer appropriate options such as working with the customer to devise a repayment strategy, putting together bespoke tiered mortgages, or closely monitoring for changes in financial circumstances where the customer cannot currently afford to make repayments.
Juliet Coukham said: "Interest-only mortgages have always been a challenging product for lenders, who until the point of maturity have no clear indication of whether the debt can, or will, be repaid. The reasons a borrower may be unable to repay are varied, but the key to a favourable outcome is identifying the shortfall at an early stage, followed by dialogue with the borrower to understand the circumstances and explore options for remediation.
"This whitepaper explores the opportunities that lenders have to take positive action to mitigate the risks, in a way which is affordable for the borrower and without offering mortgage concessions, which would be classed as forbearance."
The white paper is in seven sections and can be downloaded from the Callcredit website here.