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.”