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FCA concern about lender withdrawals from interest-only

Martin Wheatley 480

The Financial Conduct Authority is concerned about the availability of interest-only mortgages after a lender exodus from the sector over the last year.

In its first annual risk outlook, the FCA says a combination of uncertainty and increased changes means firms may not be making the right strategic choices and may be misinterpreting regulatory guidance.

It states: “[It] may make it difficult for firms to step back and strategically assess the adjustments they need to make to their business models and strategies to ensure future viability and sustainability.

“This could lead to precipitous withdrawal of firms from business areas and products without fully assessing how they could continue to operate within the boundaries of new regulation.

“For example, major firms restricting interest-only mortgages because of concerns about retrospective regulatory judgements on lending decisions.”

Last week, HSBC and Accord Mortgages became the latest to pull out of interest-only deals while the vast majority of other lenders have either withdrawn or restricted their offerings.

It states: “While withdrawal from a product or market creates an opportunity for niche firms, the gap between withdrawal and the establishment of the niche market can leave consumer choices limited.

“Our responsibility to ensure the proportionality of regulation and avoid regulatory failures will be particularly challenging where protracted economic and financial market stress may lead to changes in the timing of planned regulatory reforms.”

The mortgage market review rules, which come into force in April 2014, scale back the use of interest-only by demanding more stringent repayment plans while FCA chief executive-designate Martin Wheatley has described interest-only mortgages as a “ticking timebomb”.

The risk outlook also accuses bridging finance of “exploiting regulatory loopholes” and says the use of financial advice may decline after the RDR meaning consumers will need higher financial capability.

In its business plan, also published today, the FCA says it will publish the results of an initial review into interest-only mortgages in the near future. The FSA has been investigating interest-only mortgages and the risk of existing customers being unable to repay the amount due at the end of their mortgage term.


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There are 12 comments at the moment, we would love to hear your opinion too.

  1. Do the new regulators understand that Interest Only has it’s place? – the FSA didn’t seem to

    How about people buying BTL properties doing them up & then renting them out for a few years before selling them on – interest only is a decent option for some landlords.

    How about long term interest only mortgages as an alternative to roll up lifetime mortgages with much higher interest rates – as long as retired can afford the monthly payments – what’s the problem?

    How about flexible interest only mortgages whereby a self employed person can make lump sum capital repayments to suit their cash flow – in leaner times – lower payments can assist enormously…

    The FSA it seems to me painted “interest only” as high risk and basically a dirty word as a knee jerk reaction to financial crisis caused by defaulting swaps & a collapse in bankers balance sheets from ridiculous & unfettered lending mainly in the US!

    Is it any wonder UK lenders have subsequently pulled out of the market?

  2. Agree with Julie – the lenders appears to have pulled out of the interest only market for fear of being hammered by the Regulator when rumour of reviews in to the interest only market was widespread.

    Every product has its place.

  3. I completely agree with other comments. Interest only has its place in the product portfolio.

    As an interest only customer with a mortgage that is 150% asset backed I struggled to get an interest only mortgage. I was offered coutless capital repayment options but in the longer term my investment portfolio provides me with the potential for capital growth. I ws offered an ‘offset mortgage’ which for a £10k amount investment in my bank account to offset the mortgage interest, would have saved me just £11 a month in interest payments whereas £10k invested for £15 years, even at todays low growth rates should still exceed the interest saved so who would want to use such a product?? I know what I would rather have.

    Let’s hope our new regulator sees sense.

  4. Clearly the regulator did not anticipate that by deeming interest only mortgages as “high Risk” that the majority of lenders will no longer offer them.

    Why is it that the people who allegedly know what they are doing cannot see the wood for the trees.

    Just like the Life Settlements fiasco, designating something as high risk, that had not previously caused problems means the providers will leave the market.

    And what about Equity release, these are interest only, should they now be forcibly turned into capital repayment mortgages and borrowers forced to maintain them?

  5. The FCA describe interest only as being a ‘ticking time-bomb’ and then complain that lenders are pulling out of the market – are these idiots for real?

  6. The MMR has some sound logic on many aspects including interest only – how will someone redeem if you accept that you can’t rely on house prices rises which may or may not happen?

    It is not surprsing many lenders do not want to spend time and money on documenting exactly what strategies they will and will not accept for interest only lending and what evidence they will and will not accept coupled with having to audit it all. It isn’t worth it if you can do enough business without the hassle and cost, never mind the chance you may get it wrong and get hit with a whopping fine and further reputational damage.

    Withdrawal from interest only lending is a logical outcome of interference in a market which makes the cost and risk too high even if the principle is sound.

    Don’t blame the lenders for moving to sound business models that reflect the basics of risk and reward. There is no TCF requirement for lenders to offer loans on any particular basis just because the rules allow it.

    The cost to lenders of complying with MMR is significant for standard mortgages. There is no benefit in doing extra work with significant increased risk.

    Apart from this, Lenders need to focus all their resources on getting the standard mortgage process MMR compliant. Anything else is a luxury!

  7. @Mr Mortgage I see your point. This was a mess of Lesley Titcombe at the FSA’s making, she was warned about it along with the dual pricing issue by many advisers including Stuart Duncan, Cherry and I.

  8. RegulatorSaurusRex 25th March 2013 at 10:46 pm

    No wonder I’m extinct, I can’t understand why retired people would want an interest only mortgage while at the same time accepting that may will be paying rent.

    When my colleague Lesley Titcomb was asked if she understood the concept she said she didn’t have a mortgage.

  9. MMR is another example of external interference in free commercial markets and is precisely why it and the RDR before it cannot and will not ultimately work.

    Indeed it is already starting to fail over those parts already in existance regarding mortgage prisoners etc.

  10. What did they expect when everyone knows that all a customer has to do is walk back in to a lender 25 years later and claim that no one told them they weren’t paying their mortgage off as they went?

    Regulater sides with the customer and lender loses out. Repayment mortgages are the only way to guarantee a mortgage is repaid and therefore the only business lenders want to do. You can’t blame them although it looks like the FCA are going to find a way to do just that.

    Just my humble opinion as usual.

  11. As ever the regulator understands nothing . Interest only is fine for those who would rather use their savings to invest in something other than property and obtain better returns than current mortgage interest rates. What about those who still have FS pensions that will also produce enough tax free cash to repay their mortgages ?

  12. How many new rules and regulations would ever see the light of day if, with hindsight, they could be visited years later and the perpetrators fined and closed down if they were deemed to be a stupid waste of time and mone?
    It is the FSA/FCA that are the ticking time bombs.

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