Choices on affordability

Lenders could have to assess affordability for interest-only loans on a capital and interest basis unless the borrower has a “clearly understood and believable” way to repay the mortgage.

In its first formal consultation on interest-only mortgages, the FSA says individuals can have their affordability assessed on an interest-only basis if they have an appropriate investment vehicle in place, where downsizing is a credible option or where the mortgage is repaid on death.

Relying on property price inflation and any other uncertain sources of paying the loan will be deemed unacceptable as a repayment strategy.

The FSA estimates these proposals would cost the industry £14.7m to implement with ongoing costs of between £4.8m and £14.3m a year respectively.

Crown Mortgage Management head of compliance Jane Manning says: “I welcome the reforms to the treatment of interest-only mortgages.

“Until recent years, if a borrower required an interest-only mortgage, lenders required assignment of a plausible repayment vehicle or there had to be sufficient equity in their property, at the outset, for downsizing at retirement to be a realistic option. The proposed reforms are not new but instead revert to procedures followed by lenders 10 years ago.”