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INTEREST-ONLY 
DEALING FAIRLY WITH INTEREST-ONLY MORTGAGE 
CUSTOMERS: A GOOD PRACTICE GUIDE FROM HML
The Central Bank of Ireland (CBI) published its new research on interest-only 
mortgages in Ireland in July 2014, which de...
Governance 
A written strategy 
detailing the procedural 
and policy framework 
for the management of 
expired term intere...
LIST THE OPTIONS YOU OFFER YOUR INTEREST-ONLY 
BORROWERS TO REPAY THEIR MORTGAGE 
There are three main categories of inter...
DECIDE WHAT INFORMATION YOU NEED FROM 
YOUR BORROWERS 
The tone and quality of borrower communications will set the scene ...
DECIDE HOW OFTEN YOU NEED TO CONTACT YOUR 
BORROWERS AND HOW 
The CBI found that 44 per cent of BTL borrowers will be past...
REVIEW YOUR OVERALL OBJECTIVES AND HOW YOU INTEND 
TO DEPLOY THESE 
Working back through the steps above, a high-level pol...
HML GOOD PRACTICE - OUR SUCCESSES 
HML has worked with a number of lenders to help shape their borrower 
engagement plans....
How much time and effort do you spend managing 
a €200 mortgage arrears case compared to a 
€200,000 interest-only mortgag...
www.twitter.com/HMLIreland 
www.twitter.com/HMLcorporate 
www.linkedin.com/company/hml 
www.hml.ie
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Interest-only mortgages in Ireland: a good practice guide from HML

The Central Bank of Ireland (CBI) published its new research on interest-only mortgages in Ireland in July 2014, which detailed several main findings and highlighted potential risks for borrowers who have this type of mortgage.

Early borrower engagement is key to increasing the available and sustainable repayment options for borrowers, allowing them to remain in their home at the end of their mortgage term.

This step-by-step good practice guide details what lenders should be doing to deliver their interest-only borrower engagement strategies. HML is available to support you with interest-only borrower servicing, so please feel free to get in touch to discuss your needs.

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Interest-only mortgages in Ireland: a good practice guide from HML

  1. 1. INTEREST-ONLY DEALING FAIRLY WITH INTEREST-ONLY MORTGAGE CUSTOMERS: A GOOD PRACTICE GUIDE FROM HML
  2. 2. The Central Bank of Ireland (CBI) published its new research on interest-only mortgages in Ireland in July 2014, which detailed several main fi ndings and highlighted potential risks for borrowers who have this type of mortgage. Early borrower engagement is key to increasing the available and sustainable repayment options for borrowers, allowing them to remain in their home at the end of their mortgage term. This step-by-step good practice guide details what lenders should be doing to deliver their interest-only borrower engagement strategies. HML is available to support you with interest-only borrower servicing, so please feel free to get in touch to discuss your needs. REVIEW THE CBI’S MAIN RESEARCH FINDINGS ON INTEREST-ONLY MORTGAGES The CBI’s main research fi ndings are outlined below: • During the height of the boom, many mortgages were originated on interest-only terms • Between 2005 and 2008, the majority of interest-only mortgages were issued to buy-to-let (BTL) investors at a high loan-to-value (LTV) ratio on tracker mortgages • Interest-only mortgages were more likely to be issued to BTL borrowers in Dublin for the purchase of apartments. These loans also experience a higher arrears rate than standard mortgages • Over the next two years, a signifi cant number of interest-only mortgages are due to revert to principal-and-interest (P&I) repayments, which could lead to a rise in mortgages arrears • Of those BTL borrowers with interest-only mortgages, 44 per cent will be past retirement age when their loans are due to revert to P&I repayments. There are 14 years on average until these borrowers retire In an August 2014 letter to lenders, the CBI said it advocated a proactive approach and expected lenders to take “appropriate and consumer-focused steps now to identify and work with borrowers to mitigate the risk of negative outcomes to them in the years to come”. The message to lenders is clear. In the UK, the Financial Conduct Authority put forward several good practice guidelines which are noted in the table. Lenders in Ireland may fi nd these useful to cross-reference against to ensure their interest-only borrower engagement strategies are as comprehensive as possible.
  3. 3. Governance A written strategy detailing the procedural and policy framework for the management of expired term interest-only mortgages Document reasons why lenders haven’t offered borrowers certain options Interest-only strategy options Switch to full or part capital repayment with borrower agreement after an affordability check Overpayments Mortgage term extension where appropriate Waive normal fees and charges for borrowers changing to alternative products or repayments Where options are agreed verbally, follow up in writing Documented guidance framework Front-line staff to have a written policy and procedural guidance to ensure a consistent approach Give borrowers (both before and after maturity) appropriate options Assess borrower’s ability to pay should the mortgage extend into retirement or varying the mortgage term increases repayments Repossession action is a last resort A defi ned criteria is in place for mortgage product and/ or interest rate change Regular reviews of a borrower’s circumstances when forbearance measures are in place Appropriately trained staff to deal with borrowers Management Information Communications strategy responses Options deployed before and after term maturity Post-maturity rolling options Post-maturity arrears, litigation and repossession Predictive data including payment behaviours Collate information to capture current repayment strategies for existing interest-only borrowers, which should be used to develop the fi rm’s interest-only strategy Communications prior to maturity Regular and earlier borrower contact communications strategy, with more regular communications as they approach the end of the mortgage term Set out options for borrowers concerned about repaying their mortgage A simple process A helpline with opening times noted Inform borrowers of free impartial or independent advice services Provide a balanced position including risks of inaction Communications tailored to individuals Communications reviews to improve borrower engagement Communications followed by telephone campaigns Communications which take into account alternative repayment strategies, such as downsizing Requests for proof of repayment strategies are proportionate and balanced Communications adapted for borrowers currently in forbearance arrangements or arrears Online access to income and expenditure tool Encourage borrowers to contact the fi rm to agree a resolution after maturity Communications post maturity Communications which encourage borrowers to contact lender
  4. 4. LIST THE OPTIONS YOU OFFER YOUR INTEREST-ONLY BORROWERS TO REPAY THEIR MORTGAGE There are three main categories of interest-only mortgage borrowers in Ireland: 1) BTL investors 2) Borrowers on interest-only mortgages as a temporary forbearance measure 3) Borrowers on interest-only residential mortgages that are planned to, after a set term, move to principal-and-interest (P&I) repayments Repayment options that lenders in Ireland could offer to borrowers, if appropriate to their circumstances, include extending the mortgage term to allow more time to repay the outstanding balance, accepting overpayments and converting to part or full repayment. Lenders should identify the options that they currently offer or are prepared to offer and note any additional borrower criteria that need to be considered, such as whether it is appropriate for the term to be extended beyond normal retirement age. This step presents the opportunity to develop innovative products and services, such as improved product rates, equity release, shared partnership mortgages and assisted voluntary sales. DECIDE HOW YOU WILL DEAL WITH BORROWERS POST-MATURITY Lenders need to be aware that some borrowers will need to be contacted post-maturity and be encouraged to engage with their loan provider regarding the repayment of their loan. The outcomes lenders wish to implement for borrowers with matured interest-only mortgages need to be defi ned and procedures documented. Some of the tasks that may be involved include establishing robust supplier arrangements, such as with solicitors, asset managers and fi eld agents, and altering the content of letter templates and call scripts.
  5. 5. DECIDE WHAT INFORMATION YOU NEED FROM YOUR BORROWERS The tone and quality of borrower communications will set the scene for successful borrower engagement. HML has developed call scripts and letter templates for several lender-borrower contact campaigns, with information currently collected including: • Whether the borrower has a repayment plan and what the repayment plan is • Is the repayment plan suffi cient to clear the loan – how does the borrower plan to repay any shortfall • Any additional information regarding the plan, including its value and when it matures In circumstances where the borrower isn’t able to repay their loan, a Standard Financial Statement should be carried out to determine the appropriate options available to them. DEVELOP A WAY TO CAPTURE DATA HML has developed a borrower repayment strategy screen on its iCONNECT system to capture information about repayment plans. The majority of information that is collected is produced in a measurable format to allow for the effective reporting of a mortgage lender’s portfolio. It is useful to compare borrowers’ responses to their risk parameters, such as their age, LTV, remaining balance and the remaining term. This creates a clearer picture of each borrower and how they should be categorised in terms of communication priorities and the risk of them not repaying their loan at the end of its term. In the UK, we use predictive analytics to assess each borrower quickly and accurately, with the output a set of forward-looking predictions that describe how each borrower is likely to behave in the future. In Ireland, due to a different fi nancial and regulatory environment, we draw solely upon payment and contact history (behavioural analytics) instead. HML is in the process of developing advanced analytics in Ireland that adhere to the country’s different fi nancial and regulatory environment and that will help borrowers and lenders benefi t from more tailored contact and collections strategies. The borrower’s mortgage fi le should also have a clear audit trail of the deployment of options which evidences which options have been considered and if any were not offered to the borrower and the reasons why.
  6. 6. DECIDE HOW OFTEN YOU NEED TO CONTACT YOUR BORROWERS AND HOW The CBI found that 44 per cent of BTL borrowers will be past retirement age when their loans are due to revert to P&I repayments, with 14 years on average until these borrowers retire. Half of original interest-only mortgages are due to mature between 2030 and 2033. At HML, we believe that early engagement is key to increasing the sustainable repayment options that interest-only mortgage borrowers have. This is particularly important when you consider the limited time that many borrowers in Ireland have to repay their interest-only mortgage in full. In addition, the CBI has made clear that it expects lenders to take proactive steps now to contact their borrowers on interest-only mortgages. All contact HML makes to borrowers on behalf of lenders is in-line with the Code of Conduct on Mortgage Arrears and Consumer Protection Code. Our highly-trained and qualifi ed collections executives ensure borrower contact is made at the right time and is tailored to the individual. HML has found through pilot studies and borrower engagement campaigns that getting in touch with an entire interest-only portfolio instigates wider action. We have used a combination of letters and phone calls to maximise borrower engagement and have worked with lenders to produce a contact timeline based on the term expiry date. Based on this date, we state within the contact timeline whether just a letter is required, or also follow-up telephone calls. If a borrower confi rms they have a repayment plan in place, our iCONNECT repayment screen can be updated to ensure these individuals are not unnecessarily contacted, ensuring a quality experience and appropriate outcomes for the borrower.
  7. 7. REVIEW YOUR OVERALL OBJECTIVES AND HOW YOU INTEND TO DEPLOY THESE Working back through the steps above, a high-level policy document can now be created which includes all of a lender’s objectives. Information contained within this document can include what interest-only repayment options are available, who these options are available to and when and how borrowers should be contacted. This can be shared with front-line staff to ensure communications are tailored towards a borrower’s individual needs. Lenders need to review the deployment of their interest-only repayment options and assess whether they have performed as expected. Consideration should also be given to how lenders manage their existing contract variation processes, such as waiving the usual fees that would apply when changing the repayment type. DECIDE HOW TO TRAIN YOUR STAFF AND MAINTAIN SERVICE QUALITY HML has dedicated staff who are trained to respond to interest-only lender-specifi c needs and who have the required experience and skillset. We also have a dedicated helpline for customers to access. In addition, process fl ows, call scripts, letter templates, quality assurance checks and a training academy have all been established to ensure a quality borrower experience and appropriate outcomes for borrowers. Any interest-only communication strategies will continually need refi ning and improving to up-skill staff, bolster borrower experience and outcomes and to mitigate conduct risk. This requires time, effort and resources, but plays a central role in helping to ensure borrowers are dealt with fairly.
  8. 8. HML GOOD PRACTICE - OUR SUCCESSES HML has worked with a number of lenders to help shape their borrower engagement plans. Some of our successes include: A 61 per cent borrower contact rate from a letter and three outbound calls €12.6 million worth of balances were converted to full or part repayment following one letter that highlighted access to an online repayment calculator One client HML is working with is now on its fourth successful contact strategy Borrower feedback included: “I’m impressed by your pro-active approach to contacting your interest-only customers,” and “I’m unsure what to do and will speak to an adviser.” BENEFITS OF BORROWER ENGAGEMENT CAMPAIGNS: • Early contact instigates borrower action and provides them with more time to consider their repayment options • Engaging with borrowers earlier could help mitigate the risk of them facing repossession at the end of term • The cost of running a borrower engagement campaign is low compared to the expense of holding the capital associated with interest-only mortgages • Evidence that you have reviewed and acted upon the CBI’s interest-only mortgage fi ndings • Outsourcing borrower engagement strategies to a third party can allow lenders to focus on the core of their business • Start to manage the credit risk within an interest-only portfolio
  9. 9. How much time and effort do you spend managing a €200 mortgage arrears case compared to a €200,000 interest-only mortgage? You can discuss interest-only borrower engagement campaigns within the HML Interest Only Mortgages group on LinkedIn. For more information about good practice and how HML can help, contact David Kelly, managing director of HML Ireland on +353 86 2387145 or david.kelly@hml.ie
  10. 10. www.twitter.com/HMLIreland www.twitter.com/HMLcorporate www.linkedin.com/company/hml www.hml.ie

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