FSA could kill off interest-only mortgages
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The Council of Mortgage Lenders says the FSA could kill off interest-only mortgages with its proposals for regulating the loans in the Mortgage Market Review.
The FSA wants to ensure that borrowers have a suitable plan for repaying the capital element of the mortgage and that lenders should be responsible for monitoring that borrowers achieve this.
The CML says: “Potentially, the costs [of checking annually] and regulatory burden [of lenders taking responsibility for the performance of the repayment method] could lead to the withdrawal of interest-only mortgages from the market.”
Many lenders - including Northern Rock, Lloyds Banking Group and Coventry Building Society - have made changes to their interest-only policies recently, and the CML says it is not clear how the proposals will be of benefit.
The CML says: “It is far from clear that the costs and the impact of restricted choice for consumers would be matched by any wider benefits.
“There is clear evidence that the FSA’s approach has already resulted in more restricted availability of interest-only mortgages. Some lenders have announced they will no longer offer them to first-time buyers, or those wanting to borrow more than £500,000.”
The CML adds that the measures will exclude an option from borrowers for whom an interest-only mortgage is an ideal product.
It says: “The FSA’s risk-averse approach will have a major negative impact on product choice for UK consumers and the flexibility of the market to meet the needs of borrowers with different income and employment profiles. In our view, the reforms on interest-only mortgages outlined by the FSA risk excluding an option from particular groups of consumers for whom it is a logical choice, and delivers clear benefits.”
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Readers' comments (34)
Anonymous | 8 Sep 2010 3:55 pm
The potential loss of interst only mortgages will also impact on the ability of companies to recruit as many flats and small second homes are purchased as "digs" for workers who are relocated to London and similar centres leaving their families in rural locations. For these individuals the cost of an interest only mortgage is often lower than the rent of a similar property.
When the individual subsequently retires or returns to their families the property is sold to clear the mortgage. If these individuals are forced to secure the mortgage on a repayment basis the cost of their recruitment may preclude them from the opportunities.
So much for helping people to obtain work in these diffiicult tiems.
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Kevin Archer | 8 Sep 2010 4:13 pm
Interesting: Excuse the pun. Perhaps the buy to let market will collapse as few borrowers pay of capital. They raise income from the margin between rent received and cost of borrowing.
Perhaps there is also another motive like removing debt from a persons estate (IHT) and thereforeincrease the tax take
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Sean | 8 Sep 2010 4:15 pm
The current financial crisis was caused by two things:
a) banks buying american debt that they didnt understand
b) banks lending to people who shouldnt have been able to get a mortgage in the first place (encouraged by the Government of the time who wanted to increase home ownership in its heartlands).
Why shouldnt a client be able to take out an interest only mortgage as long as it is pointed out that should they not set up a suitable repayment vehicle they will have to sell their home when the mortgage term ends?
We appear to living in a nanny state.
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acc | 8 Sep 2010 4:23 pm
Maybe they could bring back something like.....assignment of endowment policies or the like!
Seriously though, if you're going to do the job properly then compulsory protection should be top of the list and that should be monitored........clearly forms of investment are not the tools for the job in the current climate and the property value or other assets have to have much more of a case.
Of course interest only is the right solution for the right candidate and perhaps yet again the FSA need to get to grips with understanding the market they're supposed to be regulating!
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Anonymous | 8 Sep 2010 4:24 pm
Why not? They've damn near killed everything else in the industry, after all.
Interest Only is fine as long as suitable investment products exist to repay the loan at end of term, and the borrower is made aware of the risk of shortfalls.
True, far too many clients take Interest Only simply as a means of reducing the monthly cost.
So perhaps the FSA should take a more active role in regulating lending policy and suitability of advice instead of vandalising the industry even more than they already have?
That would be the sensible approach, which is exactly why I'm not holding my breath waiting for it to happen. Bureaucratic idiots.
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Alan Lakey | 8 Sep 2010 4:24 pm
Yet another idea for protecting consumers that actually removes their choice and, in many instances, fouls up their existing financial planning.
Many clients rely on an inheritance,n tax-free cash from pensions, sale of investment properties of simply a future downsize as a means of repaying outstanding capital.
Are consumers so truly stupid that they cannot be relied on to make decisions for themselves?
As Professor Jim Gower stated, when unveiling his plans for consumer protection in 1984, Consumers should not be made fools of but should be allowed to make fools of themselves.
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Bob Tiley | 8 Sep 2010 4:25 pm
I totally agree with Sean. Why shouldn't I, as the consumer, take out an interest only mortgage if I want to. The issue surely is the consumer fully understanding that the capital will need to be repaid at the end of the term which may oinvolve sale of house. This wont cause a problem if the client is determined to downsize. Surely it should be down to customer choice not regulatory dictates.
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terry arch | 8 Sep 2010 4:33 pm
This all smacks of a communist state. All the people in government and the FSA have no doubt got a mortgage so they are in safe hands. Why should they stop people from having interest only mortgages providing they understand the implications. Its a bit like the cretin who suggested potential borrowers should take an exam before buying. We have restricted borrowing already with most deposits required being 15 to 25% This will just be another nail in the coffin of builders, first time buyers and home movers. I get fed up with all these idiots pontificating over the general public, without doing a proper reasearch as to the costs and effects of their decisions
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Matt | 8 Sep 2010 4:34 pm
I agree, Sean.
This sounds like another example of the FSA looking to minimise the role of the adviser in the financial industry, when surely the point should simply be to ensure clients are in a more suitable position from the outset of a contract.
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Malcolm | 8 Sep 2010 4:38 pm
Interest only mortgages for a couple of years before reverting to repayment can be a perfect solution for couples about to have a baby where maternity pay temporarily reduces the household income.
This is just one of many examples of where interest only should have a valid place in the residential market as well as the buy to let market.
There's also no need for providers to request evidence of income on all applications that currently qualify for fast track. Just increase the random audit to 20% and report any cases where evidence is not provided. That will deter the cowboys giving our industry a bad name without pushing costs through the roof.
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