In the wake of the latest announcement by the UK government regarding mortgage support measures, a host of questions are starting to emerge, especially around the knock on consequences in the collections and recoveries industry.
Two central measures of this agreement between the government and banking sector were announced on Friday 23 June 2023:
- Homeowners will not face repossession for 12 months following their first missed payment.[1]
- Customers will have the option to switch to an interest-only mortgage for six months without impacting their credit bureau files.
Media reaction focused heavily on the first measure, despite the fact that even the fastest repossession processes take 6-7 months and, in practice for many customers, already making partial payments trying to stay ahead of bills, it takes beyond the 12 month period. So, whilst making good headlines, it may in reality have a much more muted impact.
However, the second element of moving to interest-only is an altogether different matter. While seemingly straightforward, within lies a complexity of process and system changes. With choices and consequences for customers, it does need thinking through in some detail.
Interest-only mortgages: a minefield of questions
We have had recent experience of switching customers to interest-only payments during the COVID pandemic, which will help prepare some of the groundwork. However, we also know it raises many operational complexities and issues, not least of which is around capital repayments; namely, capital is not going to be repaid during this period, so when is it due?
There are a few straightforward options here for customers:
- Repay as a lump sum at the end of the interest-only period – a large single payment for customers, which for many will be hard to make.
- Spread across the remaining term of the mortgage – this results in lower payments than the lump sum, however over the lifetime of the mortgage this will also result in more interest being paid. Is this the best outcome for the customer and what happens if the interest rate changes again? Something to consider.
- Pay at the end of the term – again, another large payment, but this time in the future, moving the problem to the end of the loan. This, however, results in the highest level of extra interest being charged to customers.
- More complex combinations of spreading payments over shorter periods, allowing overpayments, waiving interest, extending terms etc.
All of this highlights some of the systematic complications that arise from a pausing capital payments. Whilst the approach does offer short-term relief, it might ultimately lead to higher interest payments for customers due to unpaid capital rolling forward into the future.
Customer reaction
We also learnt during the pandemic that customers often like the idea of lower payments now, even if this means higher payments in the future.
We are already hearing reports of increased call volumes, with customers, including many who are not in financial difficulty, proactively looking for opportunities to reduce monthly payments. With the introduction of these new measures, we expect these call volumes to increase.
The banks have a two-week time period to get everything ready.
How should banks prepare themselves?
In our experience, being forewarned is being forearmed and the devil is, as always, in the detail. More clarity around the rules is still coming in from the FCA and UK Finance, however developing a solid set of policies and procedures is crucial to anticipating and mitigating some of these impacts going forward.
At Arum we continue to monitor developments, supporting banks with the design and implementation of collections processes to support good customer outcomes. If you would like to discuss anything I’ve raised in this blog or how we can help you, please email me.
About the author
Chris Warburton
Principal Consultant
Arum
Chris has over 15 years’ experience in the Credit, C&R industry. With sector experience in banking, credit card, telecommunications and utilities, Chris has a deep process knowledge, from Collections Operations to Risk Analytics. He has a thorough end to end understanding of the customer life cycle and the key levers to drive performance improvement.
[1] No further action will be taken if a Possession Order is granted from 26 June 2023.