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FSA is powerless against interest-only mortgage “time bomb”

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.”

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There are 47 comments at the moment, we would love to hear your opinion too.

  1. This article is predicated on the bogus assumption that it is either the regulator or anyone else’s responsibility to determin how people should choose to buy their homes. It is not for an unelected quango to set social policy or tell the UK population what they can and cannot do. Constitutionally it is a matter for parliament but in a free democracy I would be very uneasy about a govt that sought to legislate in this area.

  2. There would be no ticking time bomb if the FSA and the government stopped interfering in areas which are not their concerns. People on interest only mortgages (I have a very large IO mortgage) have or will have strategies to move forward in life. By preventing the re-mortgage to interest only, the regulator is actually causing the problem and of course has to come up with possible solutions (at great cost and more regulation) to address the very problem they have created!

  3. No Doubt all of those with interest only mortgages will, with the help of a cmc and retrospective fca review. suddenly remember being missold,

  4. This ‘time bomb’ is thoroughly exaggerated. Can’t repay at maturity? So what? These are often borrowers with unblemished payments records – i.e. first class customers – why not continue to lend them money (as long as security adequate) and let the estate repay on death. Everybody does die after all. A relatively small number with inadequate pensions may have issues but interest is always likely to cost less than rent.

  5. Don’t agree at all! Most people are fully aware of their obligations and some lateral thinking is necessary from lenders to allow a degree of flexibilty. Is it better then to repossess a persons home because they cannot afford a repayment mortgage or allow them to stay in THEIR home on interest only; the alternative is private rental which has no rules or regulations and at a much higher cost. The law makers are fiddling yet again!!

  6. No need for anyone at the FSA or FCA or TSC or McDonalds to worry. Advice is readily available at the MAS!

  7. about 50 % of the UK live in houses they pay rent on either to a private landlord or to the Council. they will never own their homes.
    what happens if the wage earner dies. for most people in mortgaged homes the partner of a deceased wage earner then lives in a mortgage free home as mortgages mainly come with life cover.
    so what is the problem?
    could it be that a mortgage free home may possibly be added to the estate and subject to IHT if the house is worth sufficient!

  8. I do partially agree – having friends who could not really afford a repayment mortgage or an endowment – initially using an ISA/PEP as savings for the mortgage (at the advise of an adviser) THEN when money got tighter – they stopped paying into the ISA……they are now looking at trying to find a large lump sum – when money is even tighter!

    I DO however, agree, that it is NOT for the FSA, FCA or anybody else to try to step in here.
    Mike S has the right idea – keep lending and reclaim on death…….Perhaps its lenders who need to be a bit more flexible in their approach here.

  9. Simon Webster is spot on . . . this is social engineering. How did this unelected QUANGO get the power to tell EVERYBODY how it has to live ?
    Ken is equally correct; their meddling is causing a far greater problem, by ruining any strategies that people already held. They seem to think that only people employed by the State are responsible enough to be allowed a mortgage. (Presumably their own offspring won’t thank them for this meddling; but maybe “we are all in it together” does not apply to those on gold-plated six figure Quango lifestyles ?)

  10. When the CMC’s have mopped up on the PPI missales this is their next target……..Have an IO mortgage? you could have been miss-sold, cliam your compensation today!!!!
    ~You know it is comming, just a matter of time.

  11. In this country we are infactuated with owning property. Why can a person not downsize, sell, rent? Why are we now turning interest only into a Time bomb? There are so many positive reasons not to own a property at retirement. The Govt is hellbent on kick starting the building industry, why start looking at the real issues in home funding. Conflicts of interest between Estate agents, Fina ncial services, and Surveyors for a start. Over priced leaseholds on flats and new build developments. Its not just the banks that need breaking up its the whole industry needing to become truly independent. Interest only is another method that can be used positively. No one ever asks how much equity is across these properties or have been made over a typical mortgage term of 25 years? Then go and check the RV which some one took out? Definately looking in the wrong place.

  12. This is regulation by an old copy of the Daily Mail they found on the way to work.
    Interest-only has been a useful tool for many. I don’t think the Endowment mortgage era worked for everybody yet we seem headed back in that direction.
    And what about tenants? It’s a very similar situation for them yet presumably they don’t get considered because the FSA don’t regulate them.

  13. Perhaps if FIMBRA has stepped in and stopped all the endowment compensation claimants spending the money on holidays instead of paying into their interest only mortgages we wouldn’t have a problem!!!!

  14. Time bomb you say?

    Option 1 – live in rented accomodation for 30 years, during which time you are at the mercy of your landlord, and have nothing to show at the end of it.

    Option 2 – live in your own home on an interest only mortgage for 30 years and (IF you have no way of repaying the mortgage) sell the property, pocket the equity, and join every one else in Option1.

    I know which one I’d rather choose.

  15. This is a nonsense! Just do what they do on the Continent – Lifetime Mortgages – interest only, why pay it off is their cry. The kids will collect the capital appreciation when you die.. If push comes to shove, you could always move to an Equity Release plan. There is no problem other than in the eye of the Regulator.

  16. Judging from some of the comments, I must be alone in having the FSA come round every evening to make me a cocoa, read me a page or two from me Rupert Bear Annual and switch off me beddyside lamp.

    They protect me, you know. Wherever I go, whatever I do. Otherwise I’d probably do meself some damage. Some days they untie me jacket strings, and sometimes I get to walk around the quadrangle.


    PS: Is there not an irony that on a day whey the media first discuss Osborne borrowing using pertetual bonds (with no capital repayment) as if it’s a flash of genius, we are also discussing other borrowers who are doing the same, as if it’s a flash of insanity. Funny old world, eh?

  17. The FSA seem strangely silent over the latest Government Initiative, which is to subsidise high loan-to-value mortgages for first-time buyers?

    Are special rules and regulations to apply to these ‘first-time’ buyers?

  18. This issue has to go to parliament to be removed from regulators remit, it’s not a problem in the main, and never has been, all the reasons why are stated in above comments and the issue should be left with the lenders and borrowers who will ultimately make the decisions rationalely and realistically, case by case.

  19. Agree with everyone here, does Martin Wheatley think everyone outside a regulator is stupid. My son has an interest only mortgage, could maybe have stretched to CR, but instead spent the money on improvements. Result £6,000 spent, increase in property over 2 years £26,000, maybe not typical, but in addition has reduced mortgage by £2,000 by paying ad hoc lump sums, which he intends to do as affordable. Whats wrong with that?

  20. Richard Wharram 14th March 2012 at 3:20 pm

    In response to Ken Hayden’s comment, I think the regulator and government needs to take into serious consideration the position with lenders blocking the ability of a person to remortgage their Interest Only mortgage. This will be far more damaging than anything else being discussed in the long term. Nice p.s. Bryan Jones 🙂

  21. If mortgages were still under MCCB, you would never had had self cert or interest only with no repayment vehicle in place.

    Who is really to blame, well think back to what happened in October 2004 !!

    Take some responsibility for your actions Mr Sants

  22. What is the FSA going to do about lenders that refuse to allow a borrower on an IO morgage to change to Capital Repayment?

    How does that stand with TCF? Perhaps Bob Diamond can explain his firm’s refusal or is he setting up his own lender funded by his income?

  23. Many many moons ago, in a past life, an ordnance expert at Sandhurst showed me how to DEfuse bombs (and, indded, how to disrupt them), but never once did the subject of DIFfusing them come up…

  24. Perhaps this is a hidden strategy to recapitalise the government owned banks. The existing interest-only borrowers won’t be able to remortgage and so will be forced onto their lender’s Standard Variable Rate, affording a nice profit for the largest shareholder, the British Government.

  25. @ Adam,
    And if you didn’t DEfuse the bomb correctly I expect that you would indded become ded (or dead, indeed).

  26. I had a choice, to rent or to buy on interest only.

    Today my mortgage is £225 pm

    Local rents are in excess of £600 pm and rising

    I still have the equity in my home whereas I would have nothing if I was renting.

    What the hell do Martin Wheatley and his merry men know about this subject, or anything down at grass roots level for that matter?

    I am exasperated.

  27. FSA said over a decade ago about interest only time bomb and got traffic letters being issued to cultivate claims culture. Lot of unnecessary claims got paid and borrower squandered the compensation. Now to keep their job in the new regulator outfit FSA will create an environment for more claims.
    Incidentally FSA never provided the names of providers who used wrong charging structure to keep endowment premium lower which was the cause of problem in the first place

  28. Roger Chadbourne 14th March 2012 at 4:05 pm

    We have short memories.
    It wasn’t that long ago when, to get a mortgage, you HAD to have DTA or an Endowment plan to secure the loan. That policy was then ASSIGNED to the lender, and non-payment of premiums could result in the mortgage being cancelled. This was before the days of PEP or Pension-Linked mortgages, when even a part-andpart, as the part endowment-part repayment mortgage was known, was considered avant-garde and only for the sophisticated.

    When the interest-only mortgage matured, the lender pocketed the policy proceeds returning any excess (less costs, expenses and any other piracy that they could get away with) to the lender.

    There was no question of default at maturity. Some of us thought it then a retrograde step to remove that requirement to assign the policy – the time bomb started ticking at that point, mid-80s I think.

    The next problem came trying to get the mortgage lenders to re-assign the policy back to the borrower before it matured. But that’s another story.

    The wheel has turned…..roll on retirement!

    PS – for Adam, 3:40pm – as you rightly say, defusing a bomb renders it safe. Diffusing is what happens when it explodes.

  29. Wheatley proving that like the current lot of clowns he has no idea what he’s talking about. Heaven help us!

  30. @Adam Smith
    Did he indded?

  31. @John Mayhead “do what they do on the continent…with relatives in continental Europe, in particular Germany the reality is that rental is more common but depending on city can be extortionate, and I mean nearly all of your salary for a box! Mortgage assuming you could get one is a joke, but it does make for a mobile workforce.

  32. the stats say that 30% of mortgages are on an Interest Only basis. The highest concentration of these Interest Only mortgages are in City Centre areas in what were previously termed ” Property Hotspots” as house buyers preferred interest only as it allowed them to buy at the inflated city property price and still have a lifesyle to enjoy. As house price inflation ran at such a high level and created valuable equity they could still work their way up the property ladder. This admittedly did contribute to the house price inflation. This legislation buy the FSA has now reversed this scenario and it could take as long as 20 years to flush the effects of this out of the system. Any home mover now will be faced with converting from Interest Only to FULL repayment with the additional cost being at least an extra 20% or even up to 50% if the repayment term left to NRA is relatively short i.e. 15 years. This means that home movers in this situation will only be able to afford to offer 20% below the current market value. Therefore, has anyone asked themselves what will happen to property prices in these areas over the next 10 years because of this. What does the FSA think they are doing !!! Property is a permanent, safe and secure investment and more reliable than stocks and shares that the FSA want interest only mortgage holders to have as a repayment vehicle ( anyone remember the Low Cost Endowment fiasco). So what is wrong with the sale of the property? AND any mortgage balance in retirement could be converted/ replaced with an Equity Release product or similar. The FSA are the cause of this problem which is now infringing on basic freedom of choice and free market sensibilities. The property market had already reached a plateau in August 2007 and the mortgage market has itself has made more than enough adjustment in a return to sensible lending policies as a reaction to the bursting of the economic/property price bubble.
    Something should be done to draw-in the uneccesary interfering perpetuated by the FSA as they seem to be untouchable. but we have all heard this cry before!!!

  33. You have all got it wrong!
    The regulators want us to ensure that families repay their mortgage by retirement date so they have no savings and we can sell them expensive equity release products.

  34. Can not believe some of the early response on here – I can see that some mortgage broker are more interested in their proc fees which is linked to the size of the loan then giving proper advice. Would there have been such a boom in house price between 1997-2007 if we had forced borrows to have repayment mortgages from the start.

    I DO DESPAIR ABOUT FINANCIAL SERVICES SOMETIMES.

  35. March 1987 the average House Price was £40882. If you were a first time buyer and borrowed 90% mortgage on an interest only basis =£36793 and did not pay back a penny over the next 25 year period apart from the interest payments you would today still owe £36793.
    Today based on an interest rate of say 5% you would be paying £153.30pm to the bank and likely much less based on current low interest rates. You would own a property valued at say the national average of approximately £160000 equating to positive equity of £123207. During this time you would have benefited from a secure tenancy as long as you kept paying the interest payments, and without the danger of a landlord continuously increasing your rent or asking you to move out. You also benefited from any improvements you made to your property.
    If you had not been allowed to buy because you could not meet the strict new lending criteria now being imposed by the FSA and the banks you would likely be renting and paying about £800-£1000pm for the same property.
    You would have no equity, no secure tenancy and now you need to retire little or no income to pay the high rent. You might get housing benefits to pay for that bedsit you always fancied or you might not and become homeless.
    Your landlord who has an interest only buy to let mortgage is likely sunning themselves by their pool in the South of France while drinking a glass of wine and counting your money.
    Is it better to have a repayment mortgage than an interest only mortgage? Probably yes but is it better to have an interest only mortgage or rent from someone else all your life? I would plump for interest only every time. It’s just sad that the regulators can’t help wielding their sledge hammers to crack the interest only nut without thought to the consequences and in so doing condemning future generations to a lifetime of toile in an effort to increase the wealth of their lucky landlords.
    Who says life’s unfair?

  36. Actually, Mr Wheatley,regulation is the problem not the solution.

    Recently the Halifax decided that only existing invetsments can be used and then they have to meet minimum criteria (£50k min value) and this is due to the MMR plans.

    This denies borrowers the opportunity of remortgaging to them and if other borrowers take a similarly misguided view the market will dry up with consequences for first-time buyers as well.

    Rtaher than trying to fix problems – many of which you have caused – better to accept that markets resolve themselves and every want can be met by reciprocated lending from an unconstrained lender.

  37. @ various of you

    There was INDEED a reason why I went for a safer career than E.O.D. …

  38. Why not let them continue to pay them on interest only basis until death and then redeem from the estate ? The banks were quick enough to lend the money they can wait until the borrowers die to redeem their loans.

  39. to David | 15 Mar 2012 0:40 am

    if we’d had strict lending criteria from the start your capital increase in property values would not happened in the first place. Isn’t it about time that mortgage brokers and people in financial services get used to the new reality that lending criteria is going to have a massive effect on property prices over the next 20 to 30 years.

    We as an industry need to start to encourage people to save more rather than creating debt mountains that caused problems to people’s personal situation later on in life and causes economic problems when lending becomes totally reckless.

  40. You could sell the house. Clearly understood and believable. This is a non issue except in cases where interest only deals were sold to people who were unlikely to be able to keep up the interest payments.

  41. Peter Herd, you are obviously not a financial adviser or have any working knowledge of the process. To answer your tirade. Using you home as a savings vehicle is not as far fetched as you believe. In the normal process of life and using the premise that ungreedly, employees would have received a salary increase of say 3% per year (before the banking crisis). This meant that easily using 3 – 4 times income to purchase your home, year on year, house prices could comfortably rise by 9 – 12% and was perfectly affordable by buyers. Then unfortunately as large bonuses began to be paid to bankers for higher lending figures, they started to lend up to 9 x income (in one case I was aware of), fuelling a large, unsustainable increase in property values, which is one of the reasons we are where we are today. Otherwise, the model was perfectly sustainable and everyone won!

  42. This is a very worrying statement, which when coupled with previous statements about having to protect people from themselves gives a chilling insight into the intentions of the new regulator.

    It would appear that their agenda is to eliminate risk from life altogether and therefore make it impossible for any regulated business to operate as well as completely sterilising any entrepreneurial or risk taking flair.

    I guess they will not be happy until nobody borrows, invests or takes risks. They will then have “done their job” to its maximum possible extent.

  43. While the tirade against the regulator is understandable, I disagree with some of the statements made here.

    Unfortunately, it is indeed the case that the regulator and government now DO have the right to meddle with the way the population buys houses and how advisers provide the finance for it.

    Commentators here seem to forget that our industry would be largely wiped out if the taxpayer had not been used to provide support worth £950bn (according to the NAO), in the form of the Special Liquidity Scheme, the Credit Guarantee Scheme, part ownership of banks like Lloyds, RBS, B&B, Northern Rock, and much more. These have kept the firms afloat whose products we sell.

    And to that, we need to add the unprecedented amount of cheap money made available by the Bank of England through quantitative easing, now in its 4th year, the effects of which will be felt by society for decades to come. This has kept the customers afloat, to whom we sell said products.

    All of this has been necessary as a result of an asset bubble that many banks and us advisers helped to fuel, by selling high LTVs, self certs, and interest only mortgages (often in combination) left, right, and centre.

    Since 2007, the industry has been benefiting from an artificial, popped-up economic environment. Without the BoE and taxpayers (40% of which do not own a home), we would have had hundreds of thousands of repossessions; a long overdue crash of our inflated housing bubble; more unemployment and hardship; fewer sales of financial products; and a MUCH smaller financial services industry. And i/o mortgages that rely on the sale of the house only would be a much less appealing prospect.

    And now we are enraged the government and regulator takes actions to shield the taxpayer from such a scenario?

    You are having a laugh, mate!

  44. Mike

    I am in fact a financial advisor with over 17 years experience and run a firm called Essential IFA and have a different opinion to most in my industry as for too long I have seen the misery of over commitment to property. Our industry never counsels against taking large loans in fact it encourages it as there is a large proc fee to be had for the larger loan.

    My comment was not whether house prices would rise in line with wages and inflation it was the fact that would it rise to the boom levels with self cert mortgages, 110% mortgages and allow ability of interest only mortgages with no repayment vehicle.

    I think anybody would realise that we would not have the increase in property values if all of the above vehicles are either heavily restricted or banned outright.

    Just how much has the unrestricted lending cost our country so far do we really want to repeat the mistakes of the past – I for one think not!

    The fact is the banking industry also needs loans to be repaid at some point otherwise it is always going to have a problem of capital recirculation as there is only a finite amount of money in the system at any one time. If the banks have capital tied up in interest only loans they will never have money to issue new loans to first-time buyers unless of course the persons die which we know could be a considerable length of time well beyond traditional 25 or 30 year mortgage. Of course we could have the never ending supply of money from the Bank of England in the form of that QE but as we all know this will eventually lead to inflation and cause even more problems in the economy. So I for one believe in the new mortgage market which expects loans to be repaid at some point this hopefully will also put a natural break on the housing market which is well overdue.

    Purchasing a house is meant to be exactly that purchasing not renting with the bank been the landlord that is not the way the banking system is meant to work.

    I suppose I could do what everybody else seems to do and follow the crowd but that would probably result in me losing my license like so many other mortgage brokers and financial advisers. I suspect all of this will make me a very lone voice but that’s okay as I’m quite happy not having to deal with a queue of complaints for endowment mis-selling or some of the other mis-selling scandals of recent times.

    Surprisingly, I do agree with most on here who state that the regulator is trying to do away with risk which is a mistake. It should be a mortgage market principle that loans should be repaid at the end of the term as this is always been good housekeeping.

  45. We desperately need regulators who know what they are doing,

  46. Lenders are already scared. My remortgage is due and is part RP part IO. I have b2l flat also with a b2l mortgage. The IO was to repay the initial deposit I took out on my own residence. I planned to clear mortgage in 10 yrs when I would sell the flat. No lender would allow me to take the measley amount on IO so had to do whole mortgage on CR. Result, due to affordability, is that – have to remortgage for 13 yrs as the would accept flat as a means of repayment even though it has 40k equity in it! What happened to democracy!

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