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FSA to tighten up interest-only rules and ban self-cert

The FSA is proposing 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.

In its first formal consultation on interest-only mortgages in today’s final MMR consultation paper, the FSA says exceptions to the rule would be if there were repayments from investments, where downsizing is a credible option or where the mortgage is repaid on death.

However, using property price inflation as a repayment source and any other uncertain sources of paying the loan will be deemed unacceptable as a repayment strategy. Repayment strategies must be sourced at the application stage.

Lenders would also be required to check on the repayment strategy at least once during the term of the mortgage.

The FSA estimates these proposals would cost the industry £14.7m to implement and would carry ongoing costs of between £4.8m and £14.3m respectively.

The paper says: “There is strong market support for interest-only mortgages and we recognise the value they provide to a wide variety of consumers. However, there is also a consensus view that interest-only should be a ‘niche’ product.

“We would expect most mainstream lending to take place on a capital and interest basis with interest-only being considered in limited circumstances.”

The FSA has reiterated that it remains down to lenders to decide what their income assessment criteria is for self-employed borrowers and insists it will not propose prescriptive rules for these borrowers.

The new rules confirm self-certification mortgages will be banned under the new regulatory regime, as widely expected. The regulator has also decided against a credit buffer in affordability calculations for credit impaired borrowers and forcing lenders to calculate affordability to a maximum term of 25 years.

It has also reiterated it does not want to stop lending beyond retirement age, saying lenders should make an “informed decision” about a borrower’s likely income in retirement. This means lenders may simply have to check if a borrower has a pension where retirement is a long way off.


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There are 3 comments at the moment, we would love to hear your opinion too.

  1. Do the FSA want to completely dismantle the Financial Services industry ? There isn’t a single category of business that they haven’t meddled with.

    Do they not understand that mortgages are very very difficult to place anyway without introducing these additional measures ?

    I agree that the banks have to lend responsibly, however they have cut back on staff to such a degree- how on earth will lenders cope when they have to gather all of this additonal information ?

    One of the reasons our economy is in such bad shape is that the housing market is static. These new measures can only lead to another drop in consumer confidence and with it house prices.

    At the end of the day, it will be the consumer that will suffer, the cost of implementing these new measures will be passed onto the consumer through increased arrangement fees and rates of interest offered.

    Surely a more sensible approach would be to look at the lenders that have the highest rates of reposessions and make them implement systems that will promote responsible lending whilst leaving the other banks alone.

    I’m furious- a plea- please leave us financial advisers alone !

  2. “Lenders would also be required to check on the repayment strategy at least once during the term of the mortgage.”

    Interesting of the FSA to say this. How many times do clients change lenders over a 25 year period? Would it not be checked anyway on remortgage?

    Do the FSA actually understand the real world? From what I have seen and read this year, probably not.

    Can they climb down from their canary tower and speak to people that know the industry they are supposed to be regulating.

    A frustrating end to 2011 and probably the same will apply to 2012!

  3. Bad lending should be avoided, but there are many measures of affordability that can be used, but an individual who can afford interest only may still be better off doing this over renting.

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