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Mortgage analysis: Lenders call for clarity on interest-only responsibility

CML

The FSA needs to clarify its proposed rules on interest-only mortgages to ensure lenders are not held responsible for the performance of customers’ chosen repayment vehicle, according to the Council of Mortgage Lenders.

For the past three years, the regulator has been consulting on a set of proposals to reform mortgage regulation, called the mortgage market review.

As part of its consultation, the FSA has looked to tighten up on interest-only lending by proposing 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.

Furthermore, it proposed lenders should assess the credibility of borrowers’ chosen repayment vehicles and should check on this vehicle at least once during the term of the mortgage.

However, the Council of Mortgage Lenders argues this approach could leave lenders open to blame if a borrower’s repayment strategy is unable to repay the capital at the end of the term.

In its most recent newsletter, News & Views, the CML said: “We broadly agree with the FSA’s approach and, in response to its earlier consultation, we proposed that lenders should be required to validate the existence of a repayment plan by an interest-only borrower at the point of sale.

“The FSA had also proposed that lenders should be required to assess the credibility of individual repayment plans. However, we are concerned that this could be seen by the borrower as an endorsement by the lender that his or her proposed repayment strategy will achieve the desired outcome.”

It added the FSA needs to strengthen its interest-only proposals “to make clear beyond any doubt” that lenders will not be responsible for the performance of a repayment strategy.

An FSA spokeswoman says it is right lenders take some responsibility over the borrower’s repayment strategy but stressed the final rules had not yet been published, so the current wording could change.

She says: “Lenders should make sure a borrower has got the means to pay off the capital if they have got an interest-only mortgage but the actual rules have not been published yet.”

Ray Boulger
Ray Boulger

John Charcol senior technical manager Ray Boulger (pictured left) says lenders have pulled back from the sector due to fears they could be blamed if borrowers are unable to repay their loan in full at the end of the term.

In the last month, Nationwide has stopped interest-only mortgages on new lending and Royal Bank of Scotland has stopped all non-advised interest-only sales. A number of lenders, including Santander, ING Direct and Coventry Building Society cut their maximum loan-to-values for interest-only lending from 75 per cent to 50 per cent. In May, Co-operative Bank pulled out of interest-only mortgages.

Boulger says: “I think the FSA shift the responsibility of checking repayment vehicles to the borrower. At the moment, lenders do not want the risk of being sued by borrowers if their strategy does not pay off the loan in full. That is why we have seen a number of lenders clamp down on this type of lending.”

But Chadney Bulgin mortgages partner Jonathan Clark says lenders can avoid blame by making sure they stay in touch with borrowers on a regular basis to ensure they are aware they should check how their strategy is performing and if it is likely to be able to repay the capital at the end of the term.

He says: “Lenders should treat this as an ongoing thing and keep getting in touch with their customers to remind them to check the status of their repayment vehicle. That is the way they can avoid blame.”

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Comments

There is one comment at the moment, we would love to hear your opinion too.

  1. Interest only mortgages will become too dangerous to either provide or recommend.
    Lenders will retreat from interest only mortgages purely to avoid liability.
    In our current world borrowers have no responsibility for their own actions. However for the more intelligent young client, interest only is a useful concept that could allow them to enter the Property market.
    It can be the equivalent of a semi-fixed rental agreement which includes capital growth. Is a 25 year pure interest only mortgage worse than 25 years of rental? The costs are similar yet you keep the capital growth on final sale.

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