CML warns against banning interest-only

Sarah Davidson

September 30, 2010

In its official response to MMR [CP 10/16] the lender trade body has called on the Financial Services Authority to have a public debate on how interest-only mortgages should be regulated before publishing draft rules.

The CML believes that the compliance costs for lenders of annually checking the existence of borrowers’ repayment methods and the regulatory risk of the lender making a judgement on the adequacy of the repayment method would prove prohibitive.

In its submission to the FSA, the CML acknowledges concerns about borrowers having a shortfall at the end of their term and lenders being exposed to a prudential risk by having a number of borrowers with unknown repayment methods.

However, it says the number of borrowers with a shortfall at the end of their term is extremely low, and where this occurs the lender is normally able to arrange an acceptable repayment plan with the borrower.

Lenders do not see significant losses from interest-only mortgages, said the trade body, meaning that the majority of borrowers’ repayment methods work.

CML director general, Michael Coogan, said: “Interest-only mortgages are an appropriate choice for a range of different types of consumers, including borrowers who rationally choose them as an alternative to renting, financially capable customers who make acceptable arrangements to repay the capital over the long term, and buy-to-let investors.

“We do not want to see measures that would effectively regulate them out of the market and we believe it is possible to address the FSA’s concerns, without imposing costs and requirements on lenders and borrowers that are likely to prove to be unacceptable.”

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