Interest-only loans defended to FSA
The mutuals’ trade body today responded to the Financial Services Authorities’ discussion paper on the potential changes in regulation of interest-only mortgages.
Paul Broadhead, the Building Societies’ Association head of mortgage policy, 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.”
The FSA suggests lenders take greater responsibility for validating repayment methods at the start of the mortgage term and periodically thereafter. Broadhead is concerned about such a move:
“Lenders have a responsibility to make clear to borrowers the risks of interest only mortgages and to stress the need for a repayment method,” he said. “But the FSA should avoid creating a moral hazard where customers take less interest in the performance of their finances in the mistaken belief that lenders are doing it for them.
“Shifting this responsibility to lenders will not help borrowers make well informed and rational decisions, nor will it deliver a flexible mortgage market that works better for consumers.”
Basildon-based sole broker, Danny Lovey, has also responded officially to the FSA on the future of interest-only mortgages.
He says there are too many instances where interest-only deals make sense for the customer to warrant an outright ban.
Lovey lists various situations where a repayment vehicle might not be necessary or make sense for a client, including: young professionals with a rising income; someone paid with regular and substantial bonuses; someone expecting a substantial inheritance; someone buying a large property with a view to trading down; someone with ownership of an investment property; clients with credit repair mortgages; clients who want cashflow to fund improvements on a property; and, clients transferring to interest-only as a ‘holiday’ from a repayment mortgage they can’t afford due to a change in income.
Lovey said: “It could be that domestic circumstances have changed, this could be loss of a job or the birth of a child and it makes sense to request interest-only for a period of time – surely the FSA would not wish to discourage people managing their income in changed circumstances? Surely allowing this in changed circumstances is ‘treating customers fairly’?”
Lovey also raised other concerns for the FSA’s consideration. He asked: “Does this type of flexibility keep people in their homes when otherwise they may be threatened? Should the FSA not request that lenders be ‘sympathetic’ to customers changing circumstances, rather than put additional repayment pressure on the customers as their circumstances change?”
Lovey’s concerns were not restricted to the use of interest-only however. He added that the FSA’s proposal forcing lenders to assess affordability over a 25 year period was “wrong”.
“I see no reason for the right people at the right time, particularly the young, suffering a term of 25 years for such calculations. Why not 30 or 35 if it is appropriate?” he said.
At the time the FSA published its consultation paper, Association of Mortgage Intermediaries director, Robert Sinclair, raised concerns that banning interest-only mortgages would create “mortgage prisoners” currently on deals and up to date on their payments who would not be eligible to remortgage on a repayment basis.
Lovey reiterated this view in his letter to the FSA.
He said: “What would the FSA propose to do about existing customers who are on interest only with no repayment vehicle in place? Should the FSA go for a retrograde policy of insisting on a repayment vehicle being place, and always in place, and a system of lender checks to ensure they remain that way? Will they therefore effectively remain mortgage prisoners and be unable to move mortgages and remain on interest-only?”
Lovey concluded by saying: “I would suggest that this is not appropriate for the FSA to make such decisions at this time when it is not going to be in control in the future of prudential regulation and its effects on lending.”