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Payback time

FSA data shows increasing numbers of borrowers with interest-only mortgages without a designated repayment vehicle, reports Paul Thomas

FSA figures reveal the proportion of mortgages that were interest-only and where the borrower did not have a designated repayment vehicle or where the lender was not aware of one rose to 19 per cent in the 2009/10 financial year from 15 per cent the year before.
The regulator had signalled a clampdown on interest-only lending, pledging to open discussion with lenders later in the year on possible reforms as it is concerned about loans being taken out without a repayment vehicle in place.

FSA annual product sales data indicates a rise in interest-only mortgages sold without the lender being aware of a repayment vehicle but the overall proportion of mortgages sold on an interest-only basis fell from 29 per cent to 22 per cent over the period.

Some high-street lenders moved to tighten their own criteria for lending on an interest-only basis this year. Lloyds stopped lending on an interest-only basis for mortgages of more than £500,000 and restricted the number of repayment vehicles it will accept.

Northern Rock no longer offers interest-only loans of more than 75 per cent loan to value and Coventry Building Society has lowered the maximum LTV for interest-only deals to 75 per cent and stopped offering these types of loans to first-time buyers.

MoneyQuest managing director Simon Jackson is concerned by the figures and says: “It is under-standable that borrowers want to use interest-only mortgages in the current environment but those figures are shocking.

“We should have made it clear to customers going into those deals that they need a proper understanding of the need for repayment vehicles.

Otherwise, you have not done your job properly in an advice capacity and are setting customers up for a fall.

“Lenders also need a wake-up call about approving these mortgages without knowing what the repayment vehicle is.”

But Abacus Financial director Matthew Fleming-Duffy is less concerned by the figures and says the rise could be due to lenders being more rigorous in checking if borrowers have repayment vehicles rather than just taking their word for it.

He says: “The overall proportion of interest-only mortgages is down, so the wider picture is more in tune with the direction that the FSA is moving regulation. The increase in the proportion of interest-only mortgages without a designated repayment vehicle could just be a change in the way these figures are reported.”

Fleming-Duffy says to get a better idea, each case would have to be looked at individually.

He says: “All lenders do different things. You need to look at the individual cases and ask who has got an interest-only mortgage without a repayment vehicle.

“Is it that people have not got repayment vehicles or that they have not disclosed full details to the lender?”

First Action Finance head of communications Jonathan Cornell agrees with Fleming-Duffy and says lenders have become more interested in how people intend to repay the capital part of the mortgage.

He says: “Lenders have become more stringent over the past two years about measuring these kinds of things and more interested in knowing how borrowers intend to repay these mortgages.

“Lenders were not particularly good at collecting the data and I do not think brokers realised the importance of getting the right data together.”
John Charcol senior technical manager Ray Boulger feels the data is not particularly helpful.

He says: “The FSA is actually providing the wrong information. It should be saying what percentage of interest-only mortgages have a robust repayment plan.”

He adds that more approaches to repayment should be considered. He says: “A repayment plan can be anything that is an appropriate way to pay a mortgage back. It could simply be making overpayments when it is convenient or having an interest-only offset mortgage and putting all your spare cash in an account.”

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