MMR 2012: Interest-only responsibility shifts
This is a marked change from the proposals put forward by the Financial Services Authority last year which many interpreted to mean the lender should be responsible for ensuring borrowers given an interest-only mortgage had a viable repayment method.
The FSA said: “We want to make it clear that we are not expecting firms to predict what will happen in the future.
“We expect firms to assess, so far as it is reasonably able to at the time of underwriting, that the repayment strategy has the potential to repay the capital, and nothing more.”
Under the final rules lenders will have to be satisfied the borrower has a credible repayment method and must carry out one check during the term of the interest-only loan.
The borrower is responsible for ensuring they can repay the capital and interest.
The FSA said: “The fact that the lender has assessed the repayment strategy should not be taken as a guarantee that it will repay the mortgage.
“Responsibility for repaying the capital at the end of the term remains with the customer, in line with the terms of the mortgage contract.”
The regulator said lenders will need to make underwriting judgements about whether the repayment strategy has the potential to repay the capital, as they already do.
Lenders will have to manage the risks around this if they lend on an interest-only basis.
The FSA said: “We will expect lenders’ staff to be appropriately qualified to make the judgements they are required to make in the context of the lender’s interest-only policy.
“If a lender does not have staff competent to assess a particular type of repayment strategy, then we would expect them to not accept that strategy.”
The regulator clarified that it considers property price increases or an inheritance as a speculative repayment strategy.
Tangible repayment strategies include regular deposits into a savings or investment product, or periodic repayment of capital from irregular sources of income such as bonuses.
It said the key consideration is whether the firm has evidence that the customer has a clearly understood and credible repayment strategy that, as far as the firm is reasonably able to assess at that time, has the potential to repay the mortgage.
All rules relating to interest-only mortgages will go ahead unchanged meaning a lender may assess affordability on an interest-only basis.
“This does not prevent lenders assessing affordability for interest-only mortgages on a capital and interest basis. If affordability is assessed on a capital and interest basis, the cost of the repayment strategy does not need to be included as committed expenditure,” added the FSA.
And it said it expects most mainstream lending to take place on a capital and interest basis.