FCA chief executive designate Martin Wheatley has admitted regulation cannot defuse an interest-only “ticking time bomb” where thousands of mortgage borrowers will not be able to repay the capital at maturity.
In its final MMR consultation paper, published in December, the regulator proposed that lenders must assess affordability for interest-only loans on a capital and interest basis unless the borrower has a “clearly understood and believable” way to repay the mortgage.
The problem is the new rules will have no effect on the thousands of existing borrowers who have already taken out this type of mortgages and may not have a feasible way of repaying the loan’s capital at the end of the term.
Speaking at a Treasury select committee session on the MMR today, Wheatley said: “There is a ticking time bomb which exists today. I am not sure how regulation can solve all ills. We can ensure new mortgages taken on are taken on sensible, reasonable measures.
“I do not know that we can solve the problems of the last 20 years where people may have mortgage strategies that will not pay off their home. I think individuals will have to take their own advice as to how they do that if they do not have a strategy that will repay the capital at maturity.”
The FSA has proposed some transitional measures in the MMR to allow lenders to help some borrowers switch to another mortgage if they would otherwise not be able to because of the new interest-only rules.
He added: “We have suggested some transitional arrangements for people who might otherwise be caught unable to remortgage or refinance. So there are transitional arrangements that will allow, subject to certain conditions, the roll-over into a new mortgage. That is trying to prevent that immediate crystallisation of that problem.”