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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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  • Seems more like social engineering than regulating. Why should Quango bureaucrats dictate how successful people arrange their affairs ? I have a client earning six figures, with 1/2million coming. Offset is obviously perfect. If he goes with Abbey, and mortgage greater than 50% he HAS to have a repayment mortgage. Says who? Interest only is really useful in many many cases. I don't know anyone who used it wrongly to make overstretched "affordable". The baby has been thrown out with the bath water, simply because the regulator did not stop the cowboys. Didn't regulate enough when it should have, and now bent on destroying what is left.

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  • Oh please Robert- people in your privelaged position as a spokesman for the intermediary need to understand and tell the FSA how important the broker sector is to the market- Lenders are running scared of the FSA and they (FSA) dont like the broker market hence the constant pressure and negativity towards the broker

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  • It's scary to see how many in our industry are clueless about what is actually in the MMR. Have a proper read (all of it!!) and then say that lenders are over-reacting. It's not brokers who will be held accountable if/when it all goes wrong under the new regime!

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  • I have taken a great deal of interest in this IO debate not least because I remember when pure interest only didn’t exist and when all endowments were assigned to the lender. In fact some lenders carried on taking assignments well into the 1990’s.or reverted to taking a deposit on the policy. In simple words lenders registered their interest in such a way that they had to be advised if the policy was surrendered. Unfortunately this practise cost the borrower money, added delays to the transaction and there was a clamour for pension linked contracts (where you can’t take an assignment) or savings plan linked interest only. Lenders started to yield to what were perfectly sensible requests but on no occasion was there an intention to ignore the concept that a repayment vehicle was to be put in place.

    Over time the exit vehicle rationale became slightly more spurious and there became a general acceptance of interest only by new entrants into the market (I wonder what percentage of GMAC’s lending was on an Interest Only basis?). The problem is that if some lenders obtained competitive advantage by being more liberal the other lenders would lose immense market share and would be disadvantaged. This is evidenced by the deregulation of the mortgage market in 1983 when Building Society share dropped from 95% of the market to less than 50% in a matter of a few years and which wasn’t redressed until The Building Societies Act of 1986.

    I think it is also important to realise that Mortgage Broking per se only became the dominant force in Mortgage Sales over the last 20 years or so. But it is the fact that Brokers have dominated the mortgage sales market that needs to be addressed in some of the comments made. It is perhaps this background that makes me look somewhat askance at Mr Sinclair’s comments. I take exception to his circus act comment inasmuch as lenders always expected a borrower to make provision the repayment of the capital sum and there is no change to this attitude. He talks about consistency of approach without referring to the fact that his members were the primary introducers of this business and in the vast majority of cases they did not want the lender dealing directly with the customer because of the paranoia of cross selling. In such circumstances the lender was obliged to either forego the business or accept the broker’s explanations and assurances that a suitable vehicle was in place. I accept that there are ludicrous examples of inheritance or trading down where there was never likely to be equity to buy another property but I can remember reading some quite plausible broker responses to this. I am also quite interested to read his comments that as ‘an industry, having got these customers into these products, it cannot be right to abandon them’. How very reasonable sounding excepting that the bulk of the sales of these products were carried out by his members and yet he wants the responsibility of the sale to be all-inclusive. And then the comment about ‘lenders just jump without mature dialog with the right stakeholders’ – is he suggesting that AMI should in some way dictate lending policy. Let’s be frank his members do not shoulder the loss or the opprobrium of a failed mortgage although they are of course trying desperately hard to find a remortgage for the older client who is coming to the end of their term with no repayment vehicle in place.

    I’m sorry but I find the whole of his argument unduly biased against the lender and heavily diluted in respect of the primary sellers of these loans despite the fact that they were the face to face contact with the borrower, sold the deal and informed the lender that a repayment strategy was in place. We all have culpability but when it comes to Interest Only but I am more than patently aware that too many brokers used the lower cost as a selling tool and the length of the term as ‘you don’t have to worry about this for a long time’ argument.

    Finally I want t make it clear that a mortgage is a loan repayable on maturity of the term. You don’t get any form of indefinite interest only borrowing – the lender expects to get their capital back. Interest Only was never intended as a substitute for rent and I believe that anyone who tries to make such an argument is in the wrong business. Yes there is a place for IO but only if there is a structured and rational form of capital repayment strategy in place. And perhaps the seller would like to take responsibility during the term of the mortgage to make sure that this happens or accept the inevitable mis-selling scandal that will accrue? I didn’t think s

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  • I think you are all missing the major factor here - INFLATION

    IO used to work well predomimantley as inflation would wipe your debt out through time - think about it, 20 years agao £50K was a reasonable size mortgage

    The problem now is that inflation is low and set to be low for years to come. If inflation isn't going to wipe/seriuosly reduce your debts, how do you seriuolsy think the average consumer is going to pay off an IO loan?

    You can all go on about consumer choice etc, but face facts, most consumers don't think 2 year haead not 25! The FSA and klenders are saviong teh majority from themselevs. And yes, in this world a minority of responsible people will suffer

    Final point to all of you bemoaning the 'death' of IO, how many IO loans do you think are out there now where the consumers have no plan or option in place for repayment? Answer?, it runs into the millions.... Of course I realise that none of the brokers commenting here would have sold a customers a loan that falls into this category

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  • The last two posts are intelligent but incorrect. Just about every lender had a pure interest-only option in the last decade, so it didn't involve brokers lieing as is claimed.

    There is nothing wrong with a viable repayment strategy as opposed to a repayment vehicle and I would argue the case for that versus a volatile investment vehicle such as an endowment.

    The current trend is highly dangerous to consumers, but it is being exacerbated by the FSA on the ground, according to lender insiders, so the "Consumers' Champion" is working directly against the interest of many consumers and the post stating that the pigeons will come home to roost when rates rise is spot on.

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  • Stuart,

    The issue isn't about brokers lying, it is about customers ability to manage a repayment strategy on an IO loan.

    When money is tight, we all know from expereince that the investment vechile often gets canned. Lenders used to assign but found it too painful chasing customers up. Result? Millions of customers who have no viable method of repaying. This is going to start hitting lenders in the next few years as these loans come to maturity. On a repayment mortgage you at least have relative certainty even if it may be viewed as 'inflexaible'

    In a world of perfect information and rationale consumers, IO makes sense for some. The problem is that a large majority of people unfortunatley need saving from themsleves. As has been said 'no one ever lost money by over-estimating people...'

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  • the powers that be at LBG weren t reading this then!!!!!!!!! LOL

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  • It is interesting to read the debate. From somebody that does not work in the industry, my view would be that when there appears to be infinite growth in property prices and stock markets then interest only options appear to make sense. Customers can reduce debt to value through house price growth and simultaneously take out an endowment which will 'out-grow' the capital borrowed - a sensible win-win.

    In an environment where house prices are set to fall and there is no certainty on long term growth of investment products, it feels prudent to ensure customers are not exposed. The industry bears a responsibility to the customer to ensure they do not make a costly mistake that they may regret in future. Feels like the FSA are trying to make sure this exposure is reduced.

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