Yet another idea for protecting consumers that removes their choice and, in many instances, fouls up their existing financial planning. Many clients rely on an inheritance, tax-free cash from pensions, sale of investment properties or simply a future downsize as a means of repaying
outstanding capital. Are consumers so truly stupid that they cannot be relied on to make decisions for themselves? As Professor Jim Gower stated when unveiling his plans for consumer protection in 1984, consumers should not be made fools of but should be allowed to make fools
Why shouldn’t I, as the consumer, take out an interest-only mortgage if I want to? The issue surely is the consumer fully understanding that the
capital will need to be repaid at the end of the term, which may involve sale of house. This will not cause a problem if the client is determined
to downsize. Surely, it should be down to customer choice, not regulatory dictates.
It seems that people who sit in the FSA and think these things do not have a clue what ordinary people need. If interest-only mortgages as a product were not available to me 18 years ago, I would have not climbed on the property ladder and today, even after the credit crunch decline, would not be sitting on £120,000 equity. People should have a choice of getting a interestonly mortgage, as, for lots of us, that is the only way to get out of rented property.
An example of the tail wagging the dog. Interestonly mort-gages are an ext – remely important part of the market and forced with –
drawal will affect house prices, Labour/employment mobility/ increased unemp – loyment, those in distress with their mortgage (losing
interest-only payment option), increased cost of state benefits as interestonly payments will no longer be available and the impact on the economy as there would be less spending. l would have thought we would want to avoid all the above if possible.
I can visualise the broker having the conversation with the client: “Well, Mr Client, I realise that while you are out of work for a few months, dropping on to an interest-only loan will save you money but I am afraid you will just have to default on your mortgage and lose your home. What’s that? Oh, yes, I understand that but you had better speakto the FSA.” The master plan is to eliminate house price inflation. This will do that at a stroke.
Once you take the route of removing choice from ordinary consumers, you have forced them intoa situation where there is no option but to rent rather than buy. The problem is there will be no investment buyers who can afford investment properties if they are forced to increase rents to match the capital and interest repayment schedules.What makes this an interesting case is that, by forcing an owner to use taxed income to repay a capital sum, it will mean that, on death, the unen – cumbered property will fall into the IHT net and HMRCwill stand to gain further tax (if applicable). But before the screaming mob point out that most houses are below the IHT threshold, remember there will be a shortage of housesand flats because occupiers cannot afford repayment mortgages, therefore, newbuild will slow, the value of existing stock will rise. Who thought of this great idea, the FSA or HMRC?
There are few problems which Governments or, in this case, regulators cannot make worse. It would be fascinating to track within the FSA where these lovely ideas come from. How about a few more FSA people taking some of the exams that we do?
The FSA ask how someone on interest-only is going to pay for their mortgage in retirement, forgetting to ask how someone paying rent is going to afford the payments. Unless you think that 25 years from now,house prices will be lower than today, the worst thing that an interest-only buyer will be faced with is selling their property, takinga profit and going back to renting, which is where the FSA would have left them in the first place.
I cannot see how outlawing interest-only mortgages is helping people get on the property ladder. As for repayment vehicles, why the need for these at all? Why not an interest-onlymortgage that runs for life, as in Germany? Perhaps not ideal for family from an inheritance stance but it
should still be cheaper than renting for life, which many do, and many more maybe forced to do from now on. The option could still be there to clear the loan if desired. Can I have a £100k job with the FSA now, please?
What is the difference between interest only and rental payments? Generally, the interest-only option is cheaper than rent and puts a cap on the client’s cost for years to come, the escalation in the value of the property, increase in earnings and generally more disposable income as the kids fly the nest make this option ideal for certain types of clients. Yet again, as hasbeen seen with its impractical proposals for RDR, TCF, etc, the regulator has no idea about the industry it alleges to regulate.