Following the Financial Services Authority (FSA) proposals to restrict interest-only mortgages and make lenders take more responsibility for the validation of borrowers’ repayment methods, the Director of the FSA has been questioned by MPs over people’s ability to pay off these loans.
Interest-only mortgages offer a cheaper means of purchasing a property compared to a capital repayment mortgage, but these loans have been the elephant in the room for the property market for a number of years.
Regulations requiring lenders to ensure borrowers had an adequate repayment vehicle that would enable them to pay off the original loan amount at the end of the mortgage term were lifted a number of years ago. Since then many home buyers have opted for interest-only loans without putting in place a repayment plan.
As the property market boomed over previous decades, the number of borrowers taking out interest-only mortgages rose considerably. The FSA estimates that 150,000 interest only mortgages will come to the end of their life every year between now and 2020, with many of these homeowners not having the money to pay off the capital due.
Measures proposed in the Mortgage Market Review look to address what Martin Wheatley, Director of Financial Services, deemed the ‘ticking timebomb’ of interest-only mortgages. However, lenders and the Building Societies Association (BAS) have argued introducing burdensome regulation on lenders will restrict the mortgage market.
Paul Broadhead, Head of Mortgage Policy at the BSA, said: “Interest only mortgages are not in themselves inherently bad or high risk and the industry has been attentive about restricting their availability to suitable customers. However, there is a real danger that the FSA could introduce over burdensome regulation that will stifle this market and affect many existing borrowers – including many for whom this is a suitable option.”
Michael Coogan, Director General of the Council of Mortgage Lenders (CML), also criticised the FSA’s proposals, arguing: “the mortgage market review is fatally flawed and should be re-evaluated”.
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