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FSA could kill off interest-only mortgages

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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Comments

There are 34 comments at the moment, we would love to hear your opinion too.

  1. 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.

  2. 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

  3. 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.

  4. 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!

  5. 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.

  6. 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.

  7. 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.

  8. 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

  9. 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.

  10. 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.

  11. It seems people who sit in FSA and think these things, don’t have clue what ordinary people needs. If interest only mortgage as a product was not available to me 18 years ago I would have not climbed on property ladder and today even after credit crunch decline sitting on £120000 equity. People should have choice of getting a Interest only mortgage as for lot of us that is the only way to get out of rented property.

  12. An example of the tail wagging the dog. I/O mortgages are exstearmly important part of of the market and forced withdrawal will impact on
    1 House prices
    2 Labour/employment mobilty/ increased umemployment
    3 Those in distress with their mortgage (loosing I/O only payment option)
    4 Increased cost of state benefits as I/O payments will no longer be available
    5 Impact on the economy as less spending would be available all being on a repayment

    All of the above l would have thought we would want to avoid if possible.

  13. The best part of regulation is no regulation and this is one area where the FSA simply does not know what it is doing.

    “Less is more”,
    “Andrea del Sarto” by Robert Browning 1855

  14. I can visualise the Broker having the conversation with the client -‘well Mr client, I realsie that while you are temporarily out of work for a few months, dropping onto an IO loan will save you money but I am afraid that you will just have to default on your mortgage and lose your home’ What’s that you say? Oh, yes I understand that but you had better speak to the FSA.’
    Another well thought out plan, playing to the top of their game again. The master plan is to eliminate house price inflation – this will do that at a stroke!

  15. The FSA could but it won’t.
    Nuclear weapons could destroy all life on Earth.
    Too much speculation chaps.

  16. It seems the FSA is trying to protect lenders more than the borrowers. I bought a 2nd property with an interest only mortgage to help fund my retirement income. It seems landlords and retirees could both be scuppered if FSA plans go ahead – I fail to see the consumer benefits.

  17. Once you go down the route of removing choice from ordinary consumers, you have forced them into a situation where there is no option but to rent rather than buy.
    The problem is that there will be no investment buyers who can afford investment properties, if they are forced to increase rents to match the capital and interest repayment schedules.
    What makes this an interesting case is that by forcing an owner to use taxed income to repay a capital sum, it will mean that on death, the unencumbered property will fall into the IHT net and HMRC will stand to gain further tax (if applicable).
    But before the screaming mob point out that most houses are below the IHT threshold, remember there will be a shortage of houses and flats because occupiers can’t afford repayment mortgages, therefore, “new build” will slow, the value of existing stock will rise.
    Who actually thought of this great idea. FSA or HMRC?

  18. When are these nice FSA people going to stop blundering around trying to fix things that don’t need fixing in an attempt to justify thier existance

  19. Abslutely right Malcolm. Interest only, in practice, in the real world.

    Income verification by any other than the lenders would mean an element of trust would have to be laid at the door of someone or an organisation that is not directly responsible to, or indeed the FSA ……………………. and that would never do, would it???????

    The middle letter could stand for sanctimonious. As regards the other 2??? well you may choose your own to fit.

    It aint gonna change though until such time as IFA’s stop bickering and either fight for what is right for IFA’s or surrender to the ‘Bully Boy’ tactics of both ex and future bankers within the FSA.

    Perhaps everybody is so afraid, so very afraid.

  20. If the FSA does introduce restrictions that cause lenders to withdraw the interest-only option then they will simply reinforce what many IFAs already believe – that the FSA hasn’t a clue and that its interference on many issues has caused untold damage to a countless number of individuals who they purport to be trying to help and protect.

    Why doesn’t the FSA ban investments that can go down in value, or insist that all life assurance providers refund the premiums unless the client dies, or demand that companies providing loans do not charge any interest, or require anyone crossing the road to wear yellow jackets, or recommend that any person without a pension should commit suicide on reaching the age of 65, or……….

    I would apologise to anyone reading this for making idiotic suggestions – but at least I am not being paid for my idiocy.

  21. George Emsden (cancerIFA) 8th September 2010 at 6:02 pm

    There are few problems which governments or in this case regulators, can’t make worse.

    Would be fascinating to track within the FSA where these lovely ideas come from.

    How about a few more FSA people taking some of the exams that we do? Too many Chiefs, not enough Indians and these people really ought to get out more.

  22. The FSA ask how someone on interest only is going to pay for their mortgage in retirement forgetting to ask how someone paying rent is going to afford the payments.

    Unless you think that 25 years from now that house prices will be lower than today the worst think that an interest only buyer will be faced with is selling their property, taking a profit and going back to renting – which is where the FSA would have left them in the first place.

  23. Actually I can see the positives of this.

    Forcing borrowers to have a repayment schedule in place and then ensuring this is maintained simply creates more adviser-client contact.

    It is baffling that so many has-beens always see the flaws in any proposal first.

    Think about it…consumers (and most advisers) really are bad at making strong decisions about their finances, hence why the nation is in so much debt.

    Creating an advice area in justifying affordability, repayment strategy and review is what this part of the RDR is all about.

    Well done!

  24. Hmm! I agree with a lot of what’s been said, and I can’t see how outlawing interest only mortgages is helping people get on the property ladder. As for repayment vehicles, why the need for these at all. Why not an interest only mortgage that runs for life as in Germany? Perhaps not ideal for family from an inheritance stance, but it should still be cheaper than renting for life, which many do, and many more may be forced to do from now on. The option could still be there to clear the loan if desired. Can I have a £100k job with the FSA now please?

  25. Thank God I saw the sense to leave this decimated industry after it was too late ! thanks to all, please turn off the light.

  26. Whats the differnce between interest only & rental payments??

    Generally the interest only option is cheaper than rent and puts a cap on the clients cost for years to come, the esculation in the value of the property, increase in earnings & generally more disposable income as the kids fly the nest make this option ideal for certain types of clients.

    Yet again, as it has been seen with its impractical proposals for RDR,TCF etc etc the regulator has no idea about the industry it alleges to regulate!!!

    CAN SOME ONE PLEASE STAND UP & TELL THEM THEY ARE CLUELESS!!!!

  27. #2 The worst case scenario is that a client sells and makes a profit!!??, Mmmm Client takes an interst only mortgage and interest rates go back up to 8/9%……they can’t afford to pay (like alot of country). Property floods the market. Prices crash. They make a loss & are in financial mess for a long time. Any IFA who has worked in the mortgage business knows that too many people are mortgaged to the hilt on interest only mortgages. If base rate was no 0.5% they would all be screwed. People – take advantage of low interest rates. Pay your mortgage down…………

  28. Is this a sign of the FSA TCF

  29. This is nonsense, what is the point of making advisers go through RDR, when the FSA will leave us with nothing to advise on. What happened to client choice and TCF, we are treating them as idiots, when many of them require flexibility. The FSA is cutting off the very hand that feeds them!!!

  30. I believe interest only mortgages are appropriate for the right applicant and bear in mind that this is the banks lending decision based on the applicatants financial circumstances and not a decision for the Government unless the Government want to start lending! Furthermore I do not believe for one minute that any interest only borrower doesnot understand the implications of an interest free loan. Everyone understands that the koan needs to be repaid at a later date and the eventual sale of the property will usually be done to clear the loan. If for any reason there was insufficient funds to repay the loan then this is the problem if the bank and frankly that can also happen and dies happen with capital & interest free loans, endowment loans etc because of negative equity or perhaps mortgage arrears!

    Let’s face up to the facts mortgages are a credit and financial risk business and the banks and the public can decupide what is best for them wuthout the FSA intervention, after all they are the worst regulators ever! Bring back self regulation the boys in the industry know what’s best for the public!

  31. Perhaps the FSA should look over the water at US mortgages –
    Why not consider mortgages that
    a) go with the house and not the people buying
    b) Lifetime interest only mortgages that can be paid off with an insurance policy or carried on to the next generation.

    Not so much short sighted – the FSA as Myopic

  32. Whilst I agree that this is an interesting debate it will do nothing to change the stance the FSA is taking and of course has spent the last 2 years looking for someone to blame and is now finding them thick and fast.

    Interest only loans are a relatively new product in a well established market place. Had interest only loans not been available perhaps we would not have seen the growth in the property sector prices and of course the growth in Buy to let, again without the sales of property we would not have seen developers being willing to build causing more problems for the market place as demand outstrips supply.

    Of course there are issues to be considered, however for one I don’t think banning interest only loans or allowing them to continue will be beneficial there is the need tor wholesale reform of the mortgage market in line with the new world we are living in now.

    Richard Smith
    http://www.thefinancezone.co.uk

  33. FSA is killing off everything other than banks.

  34. perhaps we should have an “International Burn the FSA Guidebook Day”!!!

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