Return to non-defaulted status for interest-only (IO) mortgages

5.1 The PRA expects that defaulted IO mortgages should only return to non-defaulted status following conversion to an RIO mortgage where the borrower has made a material payment of principal of the IO mortgage, such as is necessary to meet the lender’s RIO underwriting criteria. In particular, the material payment should be sufficient to reduce the loan to value ratio (LTV) to the maximum at which the lender will offer an RIO product. The payment amount could be zero if the LTV of the RIO mortgage is less than or equal to the level at which the lender will underwrite the product.

Monitoring of the return to non-defaulted status policy

5.2 The PRA expects that, for the purpose of applying Articles 178(5), 178(5A), 178(5B), and 178(5C) of the Credit Risk: Internal Ratings Based Approach (CRR) Part, a firm should define clear criteria and policies regarding when the obligor can be classified back to non-defaulted status, including in particular criteria relating to both of the following:

(a) when it can be considered that the improvement of the financial situation of an obligor is sufficient to allow the full and timely repayment of the credit obligation; and

(b) when the repayment is actually likely to be made even where there is an improvement in the financial situation of an obligor in accordance with point (a).

5.3 Firms should monitor on a regular basis the effectiveness of their policies referred to in paragraph 5.2, and in particular monitor and analyse: