Interest Only
Something that might be of interest
The looming demise of interest-only deals has sent shockwaves across a nation sitting on borrowed time. The regulator must ensure that products are available for borrowers stuck in the quagmire
by Phil Whitehouse, head of The Mortgage Alliance
There has been rumour, speculation and conjecture that the Financial Services Authority could signal the end of interest-only deals ever since the onset of the original Mortgage Market Review. This inevitably has caused lenders to re- align their offerings and take a long hard look at how they approach interest-only deals.
In its follow up Responsible Lending paper back in July 2010 the FSA announced that it planned to consult on any rule changes to interest-only mortgages but made it clear that a valid repayment vehicle should not be house price inflation or downsizing to a smaller property. In summary the paper called for major changes. Lenders were instructed to take more responsibility in assessing affordability on a capital and interest basis. It also underlined that lenders were responsible for checking that the repayment vehicle was valid at
42 mortgage introducer MARCH 2011
the outset and, unless the product was guaranteed, monitor the existence and adequacy of the repayment method by regular inspections throughout the life of the mortgage. Basically a large portion of responsibility and costs were laid firmly at the door of lenders but consultations remain in place over the potential banning of the product itself.
EmOtIvE The subject of interest-only is clearly an emotive one and can raise a number of arguments on its merits and its detriments. There is an argument that it has been abused but on the flip side it is also a product that has allowed thousands of borrowers onto the property ladder who would have struggled without it. The increased FSA scrutiny has posed questions such as; has there been any conclusive proof that interest only is a problem? Conversely do we know exactly how many mortgages there are which are due to be paid off in coming years with no obvious repayment vehicles in place? Is this the lenders’ or borrowers’ responsibility? Who’s to say any endowment or other repayment vehicle is likely to pay off the
total mortgage debt especially after the dubious performance of many funds in recent years?
COmmOn pEOplE
These fairly common questions help illustrate the differing viewpoints that interest-only has provoked and to a degree each of these possesses a valid point. However, one thing that the industry all appears to agree on is that there is certainly no excuse for any abuse of any product areas in the mortgage market. And that anyone found advising on inappropriate products or incorrectly influencing clients should face enforcement action. Focusing on one of these questions, the Council of Mortgage Lenders argues that the number of interest- only borrowers who face a shortfall at the end of their term is low. The trade body says that it is rare for lenders to repossess the property and that they are not seeing significant losses from interest-only customers. In other words, the majority of customers’ repayment vehicles work. Even the FSA concedes in the MMR that there may be circumstances where the sale of
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