The FSA statement in this morning’s consultation paper 10/16 “Mortgage Market Review: Responsible Lending”, stated: “We are also reconsidering our approach to interest-only mortgages, to address concerns around the use of interest-only where there is no repayment method in place.
“We are not consulting on proposed changes to interest-only mortgage lending in this consultation paper but opening up a further discussion on the tightening of regulation in this area to help inform our final approach on which we plan to consult later in the year.”
Ed Harley, director of mortgage policy at the FSA, said that he had been surprised by how many lenders had responded with concerns about the continued availability of interest-only mortgages.
He told Mortgage Introducer: “We had a much stronger than anticipated response from lenders on this subject, citing concerns that borrowers were applying for interest-only deals purely to stretch their affordability and the size of loan. Clearly that’s a concern from the consumer perspective, but it could also cause more problems from an industry perspective.”
But Michael Coogan, director general of the Council of Mortgage Lenders, said that what lenders wanted was clarity on their regulatory position on interest-only rather than a specific outright ban. And he added that the uncertainty that exists now means lenders are concerned that regulatory goal-posts could be moved in the future.
He told Mortgage Introducer:“The FSA’s concern with interest-only mortgages is that borrowers don’t put in place investments to back mortgage repayment and there is a school of thought that says a mortgage is a loan made against security that should be repaid over an agreed term.
“Our concern would be that any changes to regulation governing who should be eligible for an interest only mortgage would undermine two sectors of the market where interest-only is appropriate. Those sectors are buy-to-let and equity release, where they rely on the sale of the property rather than investments.
“I hope the FSA will recognise that interest-only still has a place for particular types of borrower.”
Coogan added that flexibility in the mortgage market has been a good thing in the past, and that such a simple interpretation of a mortgage would reduce the scope of the market in the future.
He said: “A mortgage can be simple and in that situation repayment mortgages are sufficient. But if you look at the complete market and realise that customers need different things at different times in their lives in terms of credit, then flexibility is a good thing.
“The problem is that a minority of people have misused some of the flexible deals on offer in some cases to consumer detriment.
"It’s a difficult balance. But if we do see interest-only deals coming out of the market, the mortgage market will be less complete, less competitive and serve fewer customers.”
Alan Cleary, managing director of Precise Mortgages, said he believed that most people on interest-only mortgages should rent going forward.
He said: “Interest only is relevant for some people but generally speaking owner occupiers should be on repayment mortgages. If interest-only deals are being used to reduce monthly payments, then that borrower can’t afford to buy.”
