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Lenders should stop viewing interest-only as the devil's spawn

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Since the height of the market when almost half of all loans were being written on an interest-only basis, we have seen many different approaches canvassed. 

Initially the Financial Services Authority, in the Mortgage Market Review, indicated that this might be the spawn of the devil.

In dialogue and later parts of the MMR we have seen a more sensitive, balanced and considered treatment of what is undoubtedly a viable option for many customers.

If the FSA has shown flexibility on this issue, the lenders have displayed acrobatic skills of a variety only seen in the best circus acts. 

Whether it is limiting these to lower value loans, applying ligatures to the types of repayment vehicles permitted, becoming “mystic meg” on the eventual value of vehicles, or introducing LTV caps, there is no consistency of approach.

In a competitive market many might argue this is good in that it allows good brokers to place business with the lender the customer fits. 

However I am concerned that this is introducing a new breed of mortgage and property prisoners, so making the prudential position of lenders worse as these are loans that will not move off the books at the usual rates of turnover. 

As an industry, having got our customers into these products, it cannot be right to abandon them with changed criteria that imprisons them to decisions they did not envisage, nor did we as the product experts think would prevail.

Our responsibility as a lending industry is deeper and we need to shoulder that burden. The product should continue to do what it said on the tin.

Certainly for absolutely new loans we need to apply tighter criteria which when applied sensibly will work for all parties.

In my dialogue with the policy teams at the FSA, they do not see this as a mass market product, nor is it niche.

It is dangerous to wrap figures or “targets” on the size of this market, but it would be safe in my view to say that it might be right for about 20% of the market.

Nor does their concern over speculative repayment vehicles extend to the type of investment vehicle. It is merely that it should not be intangible - an inheritance that may never come, or a lottery win.

I often wonder if there is a gap in how FSA supervisors interpret their policy colleagues work, or if some lenders just jump without mature dialogue with the right stakeholders.

Or it may be that other imperatives drive decisions that firms feel unable to disclose.

What is needed is sensitivity. There are a lot of interest-only customers out there on default rates that are currently a safe haven. This will not always be the case. We must not create a straight-jacket by lenders having inconsistent and conflicting policies that give regulators space to apply all the denominators and close the options in this sphere.

Our customers all deserve better of us.

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Readers' comments (19)

  • Well said Robert - this is an area where consumer choice is starting to take a battering - suspect that the latest high profile lender to introduce draconian restrictions did not do so for FSA induced reasons, but instead for lending/risk appetite linked ones. I hope we get honesty on that aspect and also hope for consumers sakes that this does not spread further.

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  • I worked for a large building society for many years. Many of the senior staff had interest only mortgages and successfully managed their way up the housing ladder. If it's good enough for those within the industry.......
    The key is the homeowners strategy for owning outright or exiting the market. If this is viable, prudent, documented, managed and monitored then it should be an option for suitable clients.

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  • Let's face interest only has been used by people who cannot afford a repayment method (now and in the foreseeable future). In the same way as self cert's have been used by the employed to buy houses at 8x plus multiples.

    However, M&S suffers from a serious theaft problem but do not strip search every customer at the door or vet them as they walk in! The self employed and those that can prove a history of large bonuses should be given the green light. Failing this, be put on a repayment agreement reviewed every 3 years for example. I would say an IFA or the bank could produce verification certificates at a charge. If they fail to meet the agreement they can be put back on a repayment mortgage. The lenders want an easy life and therefore a niche lender may step in and no doubt charge a premium to the market for I/O loans.

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  • Excellent words from Robert - there is also a huge amount of double standards being shown in the market.

    For how many years did Santander offer 75% lending on interest only without a repayment vehicle - and therefore attract swathes of clients before this about turn?

    Making them effective mortgage prisoners by not allowing them to port the mortgage at the same level for example - how is that fair?

    Seems it's mainly the advisers in the mortgage community that only have to adhere to 'Treating Customers Fairly'....

    Over to you FSA...

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  • Robert my dear industry rep- Like the lenders we are all running scared to vent our true feelings- The fact is the FSA is cracking its whip and lenders are like tamed tigers obeying their orders- Come on fsce the FSA and tell them how it is Robert (on behalf of your members). They have never understood the broker market and the credit crisis has given Bagpuss a chance to wake up and slowly kill off brokers. So AMI and all the other intermediary industry groups need to remind the FSA of the importance of the broker market to the public

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  • Sorry Guys I do not agree with either of you, but do agree that there should be consumer choice.
    The lenders are in panic mode, the MMR review, when I was at the FSA MMR roadshow on Tuesday, the FSA made it very clear on what they will be expecting of the lenders in relation to interest only mortgages and the responsibility they will be placing on them, they do not want that responsibility, to have to confirm the alternative products sustainability and to check it AT LEAST ONCE IN THE LIFETIME OF THE MORTGAGE, the lenders are not quaified investment advisors, how can they pass a judgement on an endowment policy's performance, and Isa, or god forbid a share investment portfolio's prospect of still being there and having reached an in vestment target at exactly the right time when the mortgage finishs. This will never happen, and was proved on wednesday morning when Santander changed it's lending criteria to reduce the interest only option down from 75% to 50%, this has greatly reduced, if not killed their future exposure to interest only loans in the future, all they have done is mitigated their potential compliance and risk profile with future business, not so good for the consumer i agree, but good business sense for them

    It is the regulator that needs to look at how they promote what they say, so that it is intrupretated in a fair, clear and understandable way, that can be seen to be fair and realistic, clear rules rather than the current system that all who are regulated have individual inturpretation, which always leaves a massive gray area
    Nothing will change so we must work in a positive manner with what we have, in a market that will continue to shrink for the next couple of years at least

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  • I have been saying this for years. What is wrong with interest only if it helps people keep their homes or helps a young couple on to the property ladder by making the mortgage more affordable in the early years.

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  • The FSA let this particular genie out of the bottle with their ill judged and knee jerk reactions to the credit crunch. Lenders have seized on this opportunity and closed the door for their own reasons and purposes and an excuse, yet again, not to lend. The FSA with their hopeless misunderstanding of the mortgage market has backfired badly. As stated people on interest only are sat on low svr's and trackers which means the Pigeons have not come home to roost yet but they will when rates finally go up as payments may become unaffordable and the clients will be mortgage prisoners on their lenders svr as it will not be possible to re mortgage to a better rate. Abbey already refuse to let clients in a temporary difficult period to change from repayment to interest only for a limited period and they would prefer they went into arrears with all the implications that has on future credit for the clients. All caused by the FSA which has been and will continue to be used by lenders. An absolute farce.

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  • Interest Only were "the norm" when it was ok for Lenders to mis-sell on Endowment Policies and then ISA linked Mortgages, but then as BROKERS grew in numbers and the general public were made aware of the massive Mis-selling of the Endowment Mortgage Market, Repayment Mortgages gained popularity.

    There has always remained a market for the Interest Only Mortgage though and whether that be through a Repayment Vehicle or without, on the basis that it will be sold at some time in the future to clear the debt, these are the risks that should determine the LTV of the products sold.

    Again though, Lenders are making out Interest Only Mortgages to stuff of the Devils making, and yet it's them who popularised them in the first place.

    Greedy, greedy self interested Bankers!

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  • I couldn't agree more Robert. The vast majority of people with an interest only mortgage have it for a very good reason. That may be by personal choice or it may be that they were advised to have one and are now 'trapped' by it. Either way, lenders were happy to go along with them and the FSA sat back silently as usual. First the FSA came out with those ridiculous suggestions in the MMR and the headless lenders overreacted -again. Don't any of these people read the mortgage press. They could learn a lot if they did!

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