Speaking to Mortgage Introducer Paul Smee, director general of the Council of Mortgage Lenders, said lenders had “quite reasonably reacted in a very conservative way when the FSA’s view of interest-only had emerged in the MMR proposals”.
But he said over time a more relaxed view from regulators would cause lenders to review how dramatically they restrict the product.
He hoped that the “pendulum would swing back” to a balanced view as there was a place for “properly sold” interest-only in the market.
Smee confirmed he believes the Financial Services Authority’s MMR proposals on interest-only look “pretty reasonable” on paper.
But he added: “It is in the interpretation on the front line that problems may arise.”
Most lenders have sharply reined in criteria on interest-only lending in recent months – lowering LTVs and restricting accepted repayment strategies.
Alan Lakey, principal at Highclere Financial Services, said borrowers with existing ISAs, endowments and pensions should have better access to interest-only and would benefit from lenders relaxing the rules.
He said: “These borrowers are frequently mitigated against.
“Halifax’s recent changes affect this sub-class dreadfully. Fear of the FSA and the MMR has made most lenders pull in their horns and when one moves the others tend to follow. The smaller building societies are often much more flexible but cannot compete on rate.”
And Lea Karasavvas, managing director at Prolific Mortgage Finance, said: “Many lenders have adopted a belts and braces approach and gone beyond the MMR proposals.
“As the interpretation becomes more comprehensive I would suggest many lenders will ease their criteria and a more sensible approach will be taken.
“Aldermore for example are currently leading the way offering interest-only still at 80% and acceptable repayment vehicles for them are far more logical than others.”
Karasavvas added that some lenders require £1,000,000 as a pension value on the day brokers submit the mortgage.
He said: “Even if the mortgage is only £50,000 and it is evident the lump sum will far exceed this figure the interest-only proposal will still be declined. Other lenders will not accept pensions as a repayment vehicle at all.”
He called for lenders to reconsider borrowers with a historic bonus payment.
“If they can evidence that over the last five years or more they have been in receipt of large bonuses, there is no reason why these should not be included as a repayment vehicle and allow these clients the ability to overpay using this as a method,” he argued.
“If they have sustained bonuses over the last four years in this climate, they should continue to do so and these being "ignored" is way too conservative and defies logic.”
David Hollingworth, communications director at London & Country, backed Smee’s view.
He said: “This more severe tightening does seem to have overshot to the degree that lenders are reaching the point of effectively closing their doors to many interest-only borrowers.
“Paul Smee’s comments are positive in that they recognise that there is scope from a regulatory perspective for lenders to relax their approach.
“Of course the problem is that some have toughened up so as not to be the last man standing and attract a disproportionate amount of interest-only lending. Reversing that process requires someone to step out of line with typical constraints.”
Mark Harris, chief executive of SPF Private Clients, added: “I hope Paul is right. It is time lenders stood up to the regulator and challenge when appropriate. The over correction has been extreme.”
Restriction of LTVs on interest-only is often down as low as 50%.
Abbey, Coventry, Nationwide have adopted this approach and if the borrowing requirement is beyond 50% then there can be no interest-only borrowing at all.
Some other lenders may allow a top up over the interest-only limit on a repayment basis. Skipton limits interest-only to 60% but allows a further 20% on a repayment basis.
Halifax and Woolwich still offer interest-only to 75% but have more restrictions around what is deemed an acceptable repayment vehicle.
Lloyds requires that an equity ISA fund be at least £50,000 and will allow 80% of that to be used to support interest-only.
The latest consultation paper from the FSA proposes that interest-only mortgages be assessed on a repayment basis unless there is a believable strategy for repaying out of capital wealth. This does not include the assumption that house prices will rise.
The FSA’s cost-benefit analysis at the time suggested the proposals would have a significant impact on 2.8% of self-employed and 9.6% of credit impaired borrowers while only 0.4% of the first-time buyer population would be hit.
The FSA said at the time it believed interest-only should be considered a “niche” product.
