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Choices on affordability

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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.”

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Readers' comments (2)

  • While we're at it let's go the whole hog and ban people from renting property, as after all it is the same as an interest only mortgage - interest only borrowers are effectively renting off the mortgage lenders at reduced rates (rental being normally at least 125% of the mortgage payment) - yes there is a possible depreciation risk but then there is a possible appreciation benefit and as long as the mortgage payments are made then there is no risk of repossession (the same as renting) - in fact when borrowers are in financial trouble the first port of call is to reduce payments by converting to an interest only mortgage - are we to ban this practice too? Why does the government through the FSA and other regulatory organisations insist that they know best and that we the general public need to be spoon fed and protected from ourselves - was it us that was playing golf and drinking port with the bankers instead of regulating them and negligently causing the biggest credit problem in living memory - are these really the people we should be listening too? Question - if interest only loans are the devils spawn what does that make renting....?

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  • I agree with Mike Harper.
    It's like Nero fidling while Rome burns.

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