A behavioural economics expert from Warwick Business School has told UK mortgage lenders to ditch the jargon and radically change the way they communicate with homeowners on interest-only mortgages if the UK is to avoid another financial crisis.
Professor Daniel Read, who works at Warwick Business School and has also consulted for the UK Government and the Financial Services Authority, gave the stark warning to banks and building societies facing the prospect of writing off millions of pounds because householders have no way of paying them off.
In the FCA’s thematic review on interest-only in May this year it said there had been no widespread misselling of interest-only.
But it also said that many borrowers, particularly those whose mortgage is due to be repaid before 2020, would need to take control of their mortgage repayment planning now.
To that end the FCA said it was working with the Council of Mortgage Lenders and the Building Societies Association to ensure lenders contact their borrowers in order to prompt them into checking their plan for repayment is on track and considering the options available to them.
Read believes those homeowners in trouble are suffering from “excessive irrational optimism“ and says mortgage lenders have to offer customers a simple plan of action to quickly lift them out of their problem.
He says: “Borrowers may not know what their options are. It is important mortgage lenders make their communication brief with no waffle or qualification, outlining the simple action that can help the homeowner. They should use norms as well, for example – 60 per cent of people in your situation are doing this.”
The problem he says is that people in general believe the future will be better than the present and that everything will sort itself out.
He uses the example of library charges where if someone has an overdue book and is charged just 5p a day for a late book, they will actually delay taking it back because it is not worth a trip to the library to save 5p. But if this decision is made every day the total cost can become huge.
He says: “It is similar for people who have interest-only mortgages. In order to overcome this bias the communication from mortgage lenders has to be personalized and very simple if it is to be effective. There is no point asking customers to ‘engage’ with their lender; they won’t do that, you are asking them to stare into the abyss and do they trust the lender to make the right decision for them anyway?
“Also, there can’t be a list of possible courses of action, just one course of action, and one they believe they can do and believe will have a positive effect.”
He says that lenders could start by asking borrowers to increase monthly payments by only £50. A specific action like this he says would get people started can be habit forming.
He adds: “They could increase payments over time and then maybe they will think I can put in £100 this month. It really has to be giving them an action to help them out.”