Although the Bank of England recently cut the base interest rate, the Financial Conduct Authority (FCA) has decided to press ahead with an initiative designed to ensure mortgage lenders treat customers who may be vulnerable to a rate rise in a fair manner. Lenders are then expected to put in place a strategy to assist these vulnerable customers – and firms need to note that customers do not necessarily need to be in arrears at present in order to be at risk of struggling to make repayments were a rate rise to occur.
For more than two years now, FCA rules have required lenders to assess not just whether applicants can afford the mortgage repayments at current interest rates, but also whether they could still maintain repayments were rates to rise significantly.
With this in mind the FCA has reviewed the practices surrounding vulnerable customers at nine firms, which include retail banks, building societies and non-deposit taking lenders.
The FCA notes that the nine firms are not all at the same stage when it comes to their ongoing development of such practices and procedures. It comments that “few firms would be able to implement strategies if interest rates were to rise in the near future.”
Examples of good practice in this area includes:
• Surveying existing borrowers to ascertain whether they understand the type of mortgage they hold, and appreciate what the impact of a rate rise on their financial circumstances could be
• Making it easier for customers to switch to alternative mortgage arrangements where the impact of a rate rise may be less severe. The example the FCA gives is of one firm who have removed loan-to-value limits for product transfers
• Training staff on how to identify signs of financial difficulty amongst customers, and on when such customers should receive specialist help
• Giving customers access to online mortgage calculators so they can see for themselves the impact a rate rise could have
• Writing to customers explaining the impact of a rate rise on their monthly payment, and encouraging them to take steps to prepare for a possible increase
• Working with debt advice agencies to communicate with affected customers
The regulator also comments that some firms have incorrectly excluded from their strategy both fixed rate mortgage customers and customers already in arrears. As regards the former, lenders need to be mindful of the fact that a fixed rate deal rarely runs for the entire term of the mortgage.
Lenders are urged to ensure both that they obtain management information on this subject on a regular basis, and that the effectiveness of this information is reviewed regularly.
The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.