Interest only
One size doesn’t fit all The mortgage market risks becoming too generic if the Financial
Services Authority does not reconsider its position on interest-only mortgages
by
Danny Lovey, industry guru
The mortgage intermediary has been attacked from all sides over the past three years. The number of brokers has shrunk from around 35,000 to barely 10,000. That is a massive contraction. This is due to market conditions but daily frustration and bureaucracy have also played their part and the FSA’s latest Mortgage Market Review consultation paper 10/16 has added to this. Most of us in the industry believe in avoiding previous excesses in the market but some of the suggestions in this paper will result in a nanny culture. Unaltered, these rules will be harmful to intermediaries and consumers will lose freedom of choice and the availability of advice as the market continues to contract.
ShuttIng Stable doorS Last month, the deadline for submitting comments to the FSA on their Mortgage Market Review proposals for interest-only mortgages saw many in the industry raise concerns. To my mind, their suggestion is to ban anything that does not have a repayment vehicle in place for a mortgage. The FSA’s approach in the MMR seems to be to shut the stable door after the horse has bolted. To ban interest-only mortgages because there is no repayment vehicle in place is not only unfair it is misguided. There are instances where not having a
repayment vehicle can make sense and should be allowable. For instance: • Young professionals with a rising income would find a capital repayment too tight initially but they may be a good risk and the lender content to accept them with no repayment vehicle for the time being. • Someone who has regular and substantial bonuses and would make lump sum overpayments either in or outside the initial period of the mortgage. • A substantial inheritance is likely. This would have to be arranged with a strong health warning about the customer’s ability to repay if the inheritance doesn’t come through. It is likely that a lender would only do this on a lower LTV anyway. • Buying a substantial property with the intention of trading down some time in the future – this would be on a case by case basis before recommendation and would be a feasible method for a relatively few number of people.
• A client owning an investment property. • Credit repair mortgages or various types of adverse mortgages tended to be interest-only without an investment vehicle until the credit was ‘repaired’ and the client able to afford a prime or near prime product.
• Some clients want to pay for refurbishment on a property out of cash flow and an interest-only mortgage for a period of time assists in financing this. • A payment holiday from repayment and onto interest-only is requested so the borrower can pay off expensive debt. • Domestic circumstances are liable to change, whether the loss of a job or the birth of a child and it makes sense to request interest-only for a period of time. These circumstances are all potentially reasonable cases for interest-only
mortgages. In particular, allowing borrowers to manage their income through changed circumstances is Treating Customers Fairly. The FSA is asking lenders to be sympathetic to customers’ changing circumstances but this regulation will put additional pressure on borrowers as their circumstances change. Another prospect the FSA must think about is existing customers who are on interest-only with no repayment vehicle in place. They will effectively remain mortgage prisoners and be unable to remortgage at the end of their current deal.
Something else that has not been considered is that someone who mortgages a property but does not repay the mortgage is no more of a liability to the state than someone who has rented all their lives.
Both could potentially be claiming housing benefit in later life if their income is low.
But those who have purchased their
property and repaid their mortgage are less likely to seek housing benefit, which would be a positive thing for the economy and tax payer.
Above all for the FSA to remove a
lender’s right to make a commercial decision in their assessment of whether or not to grant a borrower a mortgage on an interest-only basis goes against all freedoms that we know. It has to be the lender’s decision based on its assessment of affordability, the type of repayment vehicle it will or will not allow and its own criteria. One size has never fitted all in any walk of life and arguably no more so than the mortgage industry.n
mOrtgage intrOducer NOVEMBER 2010 45
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