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FSA: Lenders have asked for interest-only ban

The FSA says a number of lenders have asked it to ban interest-only lending as part of the mortgage market review.

In its final MMR consultation paper, published in December, the regulator proposed lenders calculate interest-only loans on a capital and repayment basis, unless the borrower has a feasible way of repaying the capital at the end of the term.

Speaking at the Mortgage Business Expo in Manchester today, FSA manager of mortgage policy Lynda Blackwell revealed some lenders have called for these loans to be banned in their feedback submissions on the final proposals.

Blackwell said: “Some lenders have asked us to ban interest-only. We have listened to all the different views and what we accept is that interest-only is right for certain borrowers.”

A number of lenders have significantly tightened their interest-only criteria since the start of the year, with many capping their maximum loan-to-value for this type of lending at 50 per cent. The Co-operative Bank has gone further by pulling out of this lending altogether.

Blackwell said the regulator is considering claims that its transitional arrangements, designed to help those borrowers who might become “mortgage prisoners” as a result of the MMR, might not be strong enough.

The arrangements allow lenders to bypass the new affordability proposals to help borrowers onto a new deal, as long as no new monies are advanced.

Last month, the Association of Mortgage Intermediaries called for the arrangements to be bolstered to allow borrowers to borrow up to 10 per cent more and allow for a 10 per cent increase to their monthly repayments.

Blackwell said: “There is a concern that we have been too restrictive in not allowing borrowers to borrow a bit more. We recognise there are times when that is the right thing to do. We will continue to analyse this and continue to speak to trade bodies before finalising our rules.”

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Comments

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

  1. David Parkinson 23rd May 2012 at 2:16 pm

    Maybe if the lenders were responsible in lending they would not need one! Just what the economy needs at the moment!!!!

  2. Absolutely ridiculous to penalise certain borrowers for the past idiocy of just about every lender.

    Will the FSA stand up for the consumer?

  3. Andrew Mallett 23rd May 2012 at 2:27 pm

    Got a client now that needs to go I/O otherwise they will miss their mortgage payments and incur arrears. Their unsecured debt is rising as their mortgage is reducing. Far better to switch to I/O for the interim then reduce the unsecured debt and restart the repayment of their mortgage at a later date.
    Also have another client with no children and in retirement – why should they make plans to reduce their debt, when they don’t need to.

    This rule may be ok going forward, but you cannot always apply retrospectively – it is not good for all consumers. Might be good for the lenders, but who are we more concerned about here – large multi-billion pound institutions or individual REAL people ????

  4. “There is a concern that we have been too restrictive in not allowing borrowers to borrow a bit more”
    My God. Talk about lurching too far in the opposite direction. The Nanny state has morphed into an Orwellian nightmare.
    Who DO these people think they are to have the right to control OUR freedom to choose and run our own lives?? What arrogance to think THEY know our personal circumstances and future plans better than we do. The solution to the previous credit crash problem (mainly of THEIR making) is NOT to remove freedom of choice, but jsut make sure that if a lender is stupid enough to lend badly, then it can fail without bringing down everything else. Quite simple. Just beyond the wit of the current lot in charge clearly.

  5. We don’t offer mortgage advice however I fear for those who have high LTV interest only mortgages – however pulling the I/O market altogether would no doubt exacerbate the problem.

    In my opinion, borrowers need to see this as a clear direction as to where lenders would like to head and therefore people need to be looking ahead and taking corrective actions accordingly.

  6. Philip Whitworth 23rd May 2012 at 2:35 pm

    The same clowns that would lend to anyone, CCJ’s IVA etc, that would happily lend on Self Cert basis are now proud to preach an end to Interest Only? The hypocrocy of it is unbeliveable!

    Some people need interest only some people should have a choice. Agree with all the comments above.

    God give me strength!

  7. william kingsley 23rd May 2012 at 2:43 pm

    For the regulator to be so prescriptive is plain wrong. Why should they tell people how to run their finances? If a client wants to pay just interest and then sell up at age 65 into rented housing,that is their choice. moving the goalposts like this is not helping people later in life who want to move house and have to have a short term on a repayment basis and its not helping the let-to-buy market which is a symptom brought on by the lack of funding for 1st time buyers. The banks are strangling the economy now as the housing market is a key driver for Britain producing work for trades people and ourselves in the property industry of course. If the housing market was more buoyant then it would kick start the whole economy. lending to small businesses is futile when demand is being supressed in this way.

  8. Hang on a second folks before everybody starts getting out of their pram maybe we would like to take stock of what has happened over the last 30 years.

    We’ve seen and never ending increase of interest only mortgages with no repayment vehicle which has helped people borrow far too much money against property and resulted in a unsustainable boom in house prices which now threatens the very fabric of our economy.

    We also see an explosion in the buy to let market which interest only mortgages are commonplace and help to increase the price of houses beyond many people’s means.

    In my book interest only mortgages should only be used for those that are in financial difficulty in paying their mortgage payments. This should only be for a short period of time while a person is able to correct their financial situation.

    Interest only mortgages should not be offered to individuals on mass and should not be used for those speculating on increase in property prices. After all this is what got is into this date in the first place. UK has got off lightly with the property bust look at what happened in Ireland and Spain if you want to see how this really goes bad.

    So before you all start shouting from the rooftops that we live in and nanny state maybe you’d like to consider the problems that got us into this state in the first place.

  9. One last point house prices are not the driving force of our economy, house building is! What we all require sustainable housing market not one that booms one year and spends the next 10 going bust. We as financial advisers need to educate people that are home is somewhere you live and it is not necessarily a pension, which is what some people in the industry have been doing for the last 30 years.

  10. Our Government borrows on interest only basis predominantly so why not the populace?

  11. @ Peter Herd

    Your take on ‘what got us into this state in the first place is’ ?

    Shall I tell you – SUB PRIME and that was predominately US driven !!!

    By the way, Lenders dont want a ban the FSA do !!! and as per usual regulatory interference (MMR) in free markets never ever works !!

    Thats why the RDR is doomed and MMR is just as damaging for the mortgage industry.

  12. Interest-only is often cheaper than renting and there’s potential capital growth. Providing the LTV is OK at the start selling and renting is always an option. If interest-only is banned the housing market as we have known it since Thatcher’s government promoted home ownership for all is finished. It is therefore immoral to consider banning interest-only mortgages because it condemns large numbers of people to the rented sector with no hope of ever owning their own home.

  13. Little fails to astonish me these days but this is one of those few instances.

    Lenders have historically pushed the I/O process as proven by the mad rush into endowments back in the mid 1980s.

    Surely the matter is one of risk. Residential mortgages are not investments and even with negative equity most borrowers stay put because they have little other choice. Therefore the risk is low. Why wouldn’t a loan of 75% or below be acceptable for I/O?

    Really, this is just another instance of theorists telling us what is best for us. The devastation that this, interest rate rises, rigid lending structures will cause will be measured in two years when property values have tumbled.

    Who will get the blame for that?

  14. johnny B Goode 23rd May 2012 at 3:41 pm

    Peter Herd is a complete fool! Well said Derek Gair! The UK mortgage market suffers very few defaults and most are caused not by “stupid” lending practises but by personal reasons such as divorce. People pay HMRC first and then their mortgage. So Why are lenders being forced into policy changes? Nanny state no! Dictatorship of the State YES!

  15. Yeah, but which lenders and why? Were they just being little parrots and agreeing with the FSA to stop the FSA looking closely at them? Interest Only still has it’s merits for certain borrowers. For example; someone who has guaranteed investments they took out on an I/O basis mortgage years ago. Why do they need a repayment mortgage under these circumstances when they clearly have a proper plan to pay off their mortgage?

    Jim W

  16. If my daughter could get an I/O she would be paying about half the amount she pays in rent.

  17. johnny B Goode 23rd May 2012 at 4:06 pm

    Oh for F**ks sake. This is a commercial decision taken by a lender to lend to whoever they want and whatever terms they want to impose. It is surely up to the borrower to decide NOT the FSA. If the borrower decides on interest only that is their choice….if it remains to be offered. State interference or dictatorship of the State on all of us????

  18. Stuart Duncan 23rd May 2012 at 5:08 pm

    @ Derek Gair 2.59

    Derek; well done for spotting the obvious – this is an attempt at “Good Cop, bad cop” by the FSA.

    Lenders do not have to have an FSA-imposed ban to stop interest-only lending, as proven by the Co-op/Britannia; they can do it off of their own back if they wish, although there are clear conflicts with TCF if they do so.

    It would be far more helpful if the FSA met their commitment in terms of being a consumer watchdog and insisted that lenders realy do treat customers fairly and allow borrowers to make intelligent decisions.

    It is strange that dual-pricing was allowed as a commercial decision (according to the departing Sants and others who have deserted the ship) but other aspects of the market are threatened with destructive rules.

    As Alan Lakey rightly says, this could cause a house price crash. Maybe that is the aim, as I cannot see any other reason for the FSA’s approach.

  19. Repayment vehicles must include sale of the property. For individuals this could include moving abroad, or returning abroad to retire, or moving into rented sheltered housing, or a care home.
    There are thousands of couples and families where no one is looking to build up equity in a building due to their personal circumstances. One of them could leave at any time – many relationships are casual – interest only is also protection for some so they can avoid being forced to sell up following a divorce. Equally there are perfectly stable households with no long term intention to stay in large family homes in premium locations, downsizing is part of their long term plan to live within their means in the future.
    There are still some who believe that the mortgage famine will see house prices plummet. Yes they have dropped from their speculative peak and their value is being eroded by inflation, but we have not seen the 50% drop that the “We’re doomed” brigade predicted, simply because there is a massive underlying shortage of property. This is well documented and does not warrant repetition here.
    All that a tougher lending criteria has achieved is to kill off new builds, making the demand for existing property even greater. This has in turn propped up prices and created the BTL boom. People in rented property are tipped into the street within months of failing to meet their rent. So what part of ‘treating customers fairly’ does withdrawing interest only mortgages achieve?

  20. Okay answer the following questions if you can:

    1 Would house prices have increased so much if interest only mortgages had been banned?

    2 Would buy to let investments of been so popular if the owners of this properties were forced to repay the capital?

    If the resulting answers were no then would house price in fact become more affordable than surely more people would own property. Yes that could mean an increase in the default rate in the short-term as we saw in the 1990s but in the long term housing stock would start to become affordable particularly with a bit of wage inflation around.

    It’s interesting to note that we have mortgage rules pre-Margaret Thatcher’s time and people still bought houses and house prices were more stable and only increased in line with inflation.

    Maybe advisers should stop thinking about their proc fee for one moment and start to think what is best advice for the client. I have forgotten how many new clients have given advice to over the years that have interest only mortgages with no repayment vehicle and have huge pension shortfalls as well.

    I also think that rents will start to fall soon as the government changes to housing benefit will start to take effect as much of the buy to let investments over the last 10 years has been subsidised by government subsidy.

  21. Hmmmm, didn’t the lenders insist that interest only mortgages had to be supported by a repayment vehicle and didn’t they take assignment of such repayment vehicles. Good old days?!

  22. I think it was 1997 when Labour came to power that assignment of policies were no longer required and we saw an explosion of interest only mortgages with no repayment vehicle in place.

  23. Peter Herd. 5:12. Interest only or LTV doesn’t push up the price of property, it’s the amount a lender will lend based on affordabity. If you lend responsibly and based on the ability of the borrower to service the loan, there is a happy place where affordability & property price meet. This occurred and was sustained for many years until the lenders increased their x income to on one occasion I was aware of 9 x income. This enabled the buyer to ‘punch well above their weight’ and pay a really high price for the property but say 3-4 times income (joint income £50k) allows a borrowing of between £150k and £200k either I/O or repayment, so how does this fuel rising house prices? All it does is give the I/O borrower more disposable income – perhaps when they need it!!!

  24. Stephen @ Create Wealth Management Ltd 24th May 2012 at 8:44 am

    Aren’t we in danger of ‘throwing the baby out with the bath water’? This issue is risk based, i.e. to what level is a lender prepraed to go to in terms of LTV on an I/O basis (as they do now). Let the market decide so that competition reigns. It’s a little rich coming form those lenders who were happy to offer 100-125% mortgages to now start preaching to the borrowers!

  25. Anonymous | 23 May 2012 5:55 pm

    Yes I totally agree with your point that multiples of income are a factor in house price increases and the invention of a self certification mortgage was an extremely bad idea.

    The fact is however, that interest only mortgages with no repayment vehicle have also added to the problem particularly with the new affordable mortgage calculators that there is no link to multiples.

    We also have to recognise that banks are not a social housing project and money has to be recirculated through out economy and therefore debt has to be repaid otherwise banks will not have liquidity to fund new loans.

  26. @ Peter Herd

    Lenders lend based solely on commercial decisions that are based on commercial experience – Interest Only is not any higher risk to default than Repayment. Fastrack (prime NOT sub prime) is no higher risk nor is self cert (prime NOT sub prime).

    Since when is it right a quango (an unaccountable unelected one at that) makes lending decissons. Markets ALWAYS decide asd one very famous lady once said ‘you cant buck the market’

    Regulatory interference in free markets is a very dangerous place to go

  27. Interest only lending may not be at high risk of default however it is high risk of liquidity within banks and also storing up lending problems in the future. If loans are never repaid and banks never have enough money to lend to new borrowers and therefore banks require to come up with more inventive ways to raise money so they can lend more e.g. structured products.

    All of these things are connected, the only way we have a more sensible and stable banking system is to have a system where loans are repaid after a specific term.

  28. @ Peter Herd

    I think you are missing the point.

    It is for the Lender to make commercial decisions (including those of liquidity, risk, interest only, fastrack, self cert, etc etc etc) not a quango !!!

    Free market economics !!!

  29. Derek

    I think you have missed the point have you not been watching the news since 2008.

    Banks can not be trusted to do it themself they tried self regualtion and it did not work.

    Before anyone says that the Banking crisis was just a problem in the US with Sub prime. We have enough of that is the UK its just not gone bust like the US due to State hand out. Look at Irland and Spain for examples

  30. Mark Coughlin 24th May 2012 at 4:34 pm

    Peter Herd | 24 May 2012 11:31 am

    “If loans are never repaid and banks never have enough money to lend to new borrowers and therefore banks require to come up with more inventive ways to raise money so they can lend more”

    I’d say what we really need is a regulator who knows what they are doing and is prepared to set out and enforce regulations that imposes a safe working framework for the banks to operate in.

    Unfortunately we have had a regulator that is excellent at bolting the stable door after the horse has bolted and coming up with knee jerk reactions to compensate for their inability to actually do their job in the first place.

    Interest only is no more risky as long as the bank do their own due diligence, which was part of the problem that lead to the problems of 2008.

    As for BTL having to have a repayment loan are you going to stipulate the same for every other business loan in the UK too or just single out BTL landlords for unfair treatment?

  31. Peter Herd

    Like I said you have missed the point I made.

    So, for the purposes of doubt you are happy with an unelected, unaccountable quango making commercial lending decisions for which they pay no price for failure ?

    i say again Free, unfettered markets – the road you appear to traverse leads to a very dangerous place !

  32. Luke Atkinson 24th May 2012 at 5:28 pm

    The number of ”mortgage prisoners” that cannot remortgage because their loans were written on a Self Cert basis or those that have mortgages with sub prime lenders and cannot move to a mainstream lender due to adverse is shocking.

    Couple this with the closure of pure interest only and once the lenders start pushing up their SVRs, the proverbial really will hit the fan. Most sub prime lender’s SVRs were linked to Libor and not BBR.

    If you think Fred Goodwin’s pension pot was big, wait for the repo figures to start coming in.

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  34. @Luke Atkinson has nailed it.

    The commercial interference of a regulator, one that supposedly looks after the interests of consumers, will cause the next consumer crisis.

    They are already preparing their alibis with this tosh about lenders asking for I/O to be banned.

    Sell today, go away, buy again in 2015, probably May.

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