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Balancing act

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Next April, the Mortgage Market Review will come into force with sweeping new rules to encourage responsible lending but, before it does, there could be one final sting in the tail.

During the next month, the Financial Conduct Authority is expected to publish a thematic review of lenders’ interest-only mortgage backbooks.

In 2012, the FSA warned that in the next 10 years, around 1.5 million interest-only mortgages worth around £120bn will be due for repayment without adequate repayment vehicles being in place. FSA figures from the second quarter of 2012 showed 77 per cent of all interest-only deals had no stated repayment method. 

FCA chief executive Martin Wheatley last year dubbed the problem a “ticking timebomb” and the review is designed to find out the size of the bomb and then dismantle it.

Association of Mortgage Intermediaries chief executive Robert Sinclair says: “We will find out whether it is a bomb or a small hand grenade and whether it is ticking or the pin is still in. I imagine the regulator will be giving guidance to lenders about what next steps it would like to see.”

The MMR toughened up the requirements on what qualifies as a credible repayment vehicle for new interest-only loans and demanded increased contact between borrower and lender. But the new review could spark more rules for existing borrowers.

Potentially millions of homeowners could face fresh calls for repayment vehicles or be forced to move to a capital repayment mortgage, paying significantly more every month. Sorting out the mess could be painful.

The news that claims chasers such as Money Boomerang are launching television marketing campaigns to target borrowers on interest-only deals will also increase the likelihood of misselling claims as changes are made.

If the thematic review shows even bigger problems than feared, the FCA’s attempts to rekindle the interest-only market will be even more difficult.

A combination of regulatory warnings, lenders reacting to competitors and concerns over future claims has sparked mass lender withdrawals from the sector in the past two years and major curbs from those remaining, making interest-only a very niche product.

However, the FCA has signalled its regret at the market reaction and highlighted the lack of new interest-only loans as an area of concern in its 2013 risk outlook.

It fears a gap in the market could harm consumers and accuses lenders of over-reacting to regulatory change.

Sinclair has sympathy with the regulator but says consumers lose out when lenders and regulators play the blame game over who caused the interest-only exodus.

One senior lending source says: “Wheatley is a man who was talking about an interest-only timebomb and approaching regulation by shooting first and asking questions later.

“There are consequences to that approach and lenders will react to it. It shows a lack of strategic thinking.”

Your Mortgage Decisions director Dominik Lipnicki says: “Interest-only has become a dirty word and it is now seen by most lenders almost as an unethical way of taking out a mortgage.

“It is a very dangerous generalisation but it would need something very strong from the FCA for lenders to return. Lenders would need to be encouraged to come back to interest-only and I cannot see that happening.”

The FCA must perform a balancing act to encourage responsible lending while not killing off the market. 

Part of that will be a quick and strong response to backbook problems without forcing lenders to turn even further away from interest-only.

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