U.K. Homeowners With Interest-Only Loans Risk Losing Properties

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Some borrowers with interest-only mortgages may lose their homes as a result of shortfalls in repayment plans, the U.K.’s Financial Conduct Authority warned.

The FCA has identified three peaks in interest-only mortgage repayments, the first of which is currently underway. Defaults are less likely in the present wave of maturities because the homeowners are approaching retirement and have higher incomes. The next two peaks, from 2027 through 2028 and in 2032, are more at risk of shortfalls, the regulator said.

Graphic: London Property Prices

Customers are reluctant to discuss with their lenders how they’ll pay off the loans, limiting their options, the FCA found. Almost 18 percent of outstanding mortgages in the U.K. are interest-only or involve only partial payment of the capital, according to the statement.

“Since 2013, good progress has been made in reducing the number of people with interest-only mortgages,” Jonathan Davidson, executive director of supervision retail and authorization at the regulator, said in a statement. “However, we are very concerned that a significant number of interest-only customers may not be able to repay the capital at the end of the mortgage and be at risk of losing their homes.”

The FCA reviewed 10 lenders representing about 60 percent of the interest-only mortgage market for the study. The supervisor also urged lenders to review and improve their own strategies regarding repayment of the loans.