FCA chief executive designate Martin Wheatley has admitted the regulator may be powerless to diffuse an interest-only “ticking time-bomb”, where thousands of borrowers will be unable to repay the capital at maturity.
In its final MMR consultation paper, published in December, the regulator proposed 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 loan.
Many borrowers who took out these types of mortgages in the past might not have a strategy to repay the capital at the end of the term. In 2007, a third of all mortgage sales were interest-only and around 75 per cent of these did not have a reported repayment strategy.
Speaking at a Treasury select committee evidence session on the MMR last week, Wheatley said: “There is a ticking time-bomb which exists today. I am not sure how regulation can solve all ills. We can ensure new mortgages taken on are taken on to sensible, reasonable measures.
“I do not know that we can solve the problems of the last 20 years where people may have mortgage strategies that will not pay off their home. I think individuals will have to take their own advice as to how they do that if they do not have a strategy that will repay the capital at maturity.”
The FSA has proposed a transitional period in the MMR to allow interest-only borrowers to move on to a new mortgage who would otherwise have been trapped by the new proposals.
Capital Fortune managing director Rob Killeen says: “Ultimately, we are looking at a situation where a lot of people will be in a bad position when they come to the end of their term and lenders everywhere will get their fingers burnt.”