Thousands of interest-only mortgage borrowers risk being evicted next year as a moratorium on repossessions ends and the watchdog’s solution falls flat.
The Financial Conduct Authority ban on repossessions during the pandemic is due to end in October 2021 raising the prospect that thousands of people struggling financially due to Covid could lose their homes.
Less than 2,300 people have taken up "retirement interest-only" mortgages (Rios), which have been allowed by the FCA for two years. They were billed as a solution for interest-only borrowers struggling to access new mortgages.
Interest-only deals allow homeowners to pay only the interest on their loans each month, making them cheaper than traditional mortgages, where repayments also reduce the debt.
The FCA estimates that 86,000 mortgages with an interest-only element will mature in the next year. Many borrowers may be too old to qualify for a new deal, forcing them to sell their homes or face repossession once their terms end.
Kevin Hollinrake, a Conservative MP, said borrowers whose loans have been sold by the original lenders to private equity groups that do not offer replacement loans are at special risk and could be left “out on the street” if they are in arrears.
Rios let borrowers keep their homes and pay interest each month before paying off the loan when they die, sell their home or move into long term care.
They were welcomed as an alternative to expensive equity release deals for older borrowers and the FCA predicted that about 21,000 would be sold annually by 2021.
However, as of June just 2,291 had been issued, according to figures obtained via a Freedom of Information Act request by equity release provider Responsible Life.
Steve Wilkie of Responsible Life said: "Rios are an outright failure. They should be scrapped in their current form and redesigned around customers in retirement, instead of bolted on to mortgage rules designed for those in full-time employment.
"The low take up of Rios tells you all you need to know about how desperately this product needs to be taken apart and put back together again."
Interest-only deals peaked at a third of all mortgage sales in 2007 but are now less common. There were 1m pure interest-only mortgages outstanding at the end of 2019, according to industry body UKFinance.
The FCA declined to comment.