Lenders must assess affordability for interest-only loans on a capital repayment basis unless the borrower has a credible repayment plan in place.
The final mortgage market review rules, published last week, emphasises that ultimate responsibility for repaying the capital at the end of the term remains with the customer, not the lender.
In the feedback to its last consultation paper in December, the regulator says some firms were concerned that the act of assessing borrowers’ repayment strategy could cause customers not to recognise that the principal responsibility for repaying the mortgage remained with the borrower.
Firms were concerned that by checking the repayment strategy it could be seen by the customer as advice, or be seen as giving the customer an assurance that the repayment strategy will perform as expected.
The FSA says it does not expect firms to “predict what will happen in the future”, and just wants them to assess, so far as they is reasonably able to at the time of underwriting, that the repayment strategy has the potential to repay the capital.
The FSA says: “Responsibility for repaying the capital at the end of the term remains with the customer, in line with the terms of the mortgage contract.”
Chadney Bulgin mortgages partner Jonathan Clark says: “It is right to calculate interest-only on a capital repayment basis because it provides a safety net.”
The FSA is aiming to publish a thematic review early next year on the issues faced by existing interest-only borrowers who are unable to repay the remaining capital at the end of the mortgage term.