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Mortgages: regulator cracks down on interest-only loans

Interest-only mortgages have become far too popular and should be restricted, says the Financial Services Authority.

 
Mortgages: regulator cracks down on interest-only loans

Interest-only mortgages should be restricted and only offered to customers in limited circumstances, the FSA proposed today as it revealed plans to crackdown on irresponsible lending.

There will not, however, be an outright ban on interest-only loans, as had been previously suggested.

At the height of the market some 33% of all residential mortgages were sold on an interest-only basis, according to the Financial Services Authority (FSA).

Because the customer did not have to repay the capital until the end of the mortgage term, customers were able to take out a bigger mortgage than they might otherwise be able to afford. Lenders also frequently offered this type of mortgage as a cheaper option for borrowers struggling to meet capital and interest repayments.

As a result, in 2007, some 75% of customers with interest-only mortgages had no reported repayment strategy. Many were reliant on future increases in property prices to repay the capital.

Today the FSA said that while it acknowledges there is still strong market support for interest-only mortgages, they should be a ‘niche product’ and only offered to customers in limited circumstances – where there is a defined repayment from an investment for example.

Most mainstream lending should instead take place on a capital and interest basis to tie in with the FSA’s principle that customers should be able to afford to repay their mortgage.

The FSA said it is determined to prevent a return of the risky mortgage lending seen in boom times by ensuring common sense standards continue to apply in the future.

The three principles at the core of its proposals are:

  • Mortgages and loans should only be advanced where there is a reasonable expectation that the customer can repay without relying on uncertain future house price rises.
  • Affordability assessments should allow for the possibility that interest rates might rise in the future.
  • Interest-only mortgages customers should be assessed on a repayment basis unless there is a believable strategy for repaying out of capital resources that does not rely on the assumption that house prices will rise.

Lenders will also be required to verify customers' income in every mortgage application – self certified mortgages will be banned. Lenders won't, as previously suggested, have to consider borrowers' outgoings in detail but will be required to take into consideration unavoidable bills such as heating and council tax.

In a bid to ensure buyers already struggling to get a mortgage are not locked out of the market, however, the FSA has promised existing borrowers they will be unaffected by the changes. Lenders are to also be given the flexibility to provide new mortgages to some existing customers even where they do not meet the affordability requirements.

Lord Turner, chairman of the FSA, said: 'While the excesses of the pre-crisis period have largely disappeared from the current market, it is important to ensure that better practice endures in future when memories of the crisis recede and the dangers of poor practice return'.

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10 comments so far. Why not have your say?

LANDLORD X

Dec 19, 2011 at 10:19

Someone tell the regulator not to worry about it

Inflation will pay off your mortgage for you

And we have negative real interest rates, so the bank is paying you to borrow

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Paul Barrett

Dec 19, 2011 at 12:58

This will have the effect of trapping the majority of homeowners in their properties even with supposed remortgage or portability facilitated for a further property purchase.

In practice the lenders won't allow this.

They will adhere to the the new policies which will mwan trapped homeowners.

The pnly way tey will move is to go and rent and become accidental landlords themselves.

Nobody is going to want to take the capital loss unless they can transfer the loss to a similar equity loss property.

It is going to take about another 10 years for eqity to equal the mortgage, so taking properties out of negative equity.

Highly unlikely properties will come down in price, they will just be rented out with the owners renting where they need to be.

This means rental properties will be in even more demand.

If the EU regulation comes in preventing BTL mortgages being obtained on a rental income criteria there will be more pressure on rents due to less rental supply coming onto the market.

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Jonathan

Dec 19, 2011 at 13:58

I even hear they are actually going to check peoples income when they apply for these massive loans.

Can you believe they weren't already doing this?

My God, we've got a bunch of idiots are running the financial systems in this country!

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Frankie Dee

Dec 19, 2011 at 15:03

The way the system worked back several years ago you could go to lets say Halifax fill in a form for a 15k loan get that go to the same bank and ask for a mrotgage use the 15k as deposit and you have a house of course you had to have the income or if not a self cert mortgage.

I never did it but it was by all accounts looking back it was that easy so when someone says i got 10 houses they may not have a pot to piss out of but they have 10 houses.

I can say another scenario please Mr lender I have no deposit but i want to buy a buy to let Ok no problem 100% loan no deposit how many do you want again providing you had a good credit history £££££.

I see many a letting agent that did just this accumalating proprty portfolios then setting up an agency they are the ones driving the Bentleys this may sound simplistic to anyone reading this but thats how it was several years ago .

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Anonymous 1 needed this 'off the record'

Dec 19, 2011 at 16:07

During the boom everything was driven by the Banks (and the markets telling them to) trying to increase or at least maintain market share. There are two ways to do this,

1) invest in systems and staff (number/training) to allow you to write more good quality business.

2) relax your lending criteria so you decline less business.

Which option do you think the Banks' took?

I remember my former employer (now largely state owned) recruiting a new team leader for their New Business team who had no banking experience and had never assessed a credit in his life? Apparently he was good a "knocking on doors" - in other words a double glazing salesmen given the ability to lend millions.

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snoekie

Dec 19, 2011 at 16:08

I got an interest only loan, back in the late 80s, but it was backed by my pension plan at the time.

I had a no accounts loan, because I was starting out on my own, quite modest loan for those days, but still less than the 'estimated' three times income still required back then.

I had a quiet smile today when I heard about the 'new' proposal being touted today.

This is what they threw out in the 90s, and look where it got them to.

We are back solid basic thinking again, and it clearly was a rule that should never have been abandoned. Clearly 'old fashion' is the new 'old' style. With that, in place we would not have had the property bubble.

In any event, I soon started paying back capital and when interest rates started dropping I didn't reduce payments, I slightly increased them, and in just over 12 years (with the help of cashing in a whole life policy) paid off the mortgage..

I am glad I did, because after the damage done by the Brown/Balls raid, I sort of have a less than half decent Sipp pot, and a lot better personal portfolio, added to after the mortgage was paid off.

'Old fashioned' thinking for house loans was solid, and tried and tested, and we are getting back to that again. It should be retained, but because prices were let rip, it is going to result in many having to save for quite a while before than can get a half decent deposit.

Mortgage repayments are always going to be better in the long term than paying rent, sorry dyslexic and Landlord x.

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LANDLORD X

Dec 20, 2011 at 22:51

@ snoekie

Yes but you bought years ago when property was much cheaper and you have had 20 years of capital growth and amortization

The future is going to be restricted borrowing and a very questionable outlook for property. We cannot simply assume that there will be 10% capital growth each year as before the credit crunch. Property prices are down 20% in real terms since 2007 and probably have much further to fall given the bad state of the economy

So buy a house for £200K and put in a deposit for £20K...then see your deposit vanish when house prices crash. And you could be worse off if the house value falls into negative equity - this is the real choice for FTBs nowadays

The risks of buying property now are far far higher than when you bought in the late 1980s

Far better for people now to rent - the low cost, low risk and flexible option that does not put your life's savings at risk in a single asset

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Jonathan

Dec 20, 2011 at 23:13

LANDLORD X,

Property prices still probably have further to fall in real terms because they were in a bubble. When it got to the stage that people couldn't afford not to buy, this was the signal that it was a bubble. The pillars are now bing slowly kicked away.

People aren't buying because they can't afford not to buy, in fact they are probably thinking that prices will go down. And if you buy a house for £300k and it goes down by 10% that's £30k you are saving yourself by not buying it.

People don't want to over extend themselves and with new rules coming in that they will need to provide proof of income before they take out a massive loan this will stop all the people who overstated their income to get larger loans that they could ever reasonably afford to repay.

Luckily for them interest rates have been kept artificially low but inflation is raging, heating bills are soaring, people will think twice before they buy a house that requires a lot of heating, better to have a small cosy place. As inflation soars and wages stay behind more linked to interest rates than inflation people who have overextended themselves by getting mortgages larger than they should (by overstating their income) are going to find it even tougher when/if interest rates do rise. The besting anyone who overextended themselves can do is pay back as much of the capital as they can while interest rates are low.

The only real hope is that inflation will push up wages so the debt will seem smaller and if inflation is enough house prices can stay the same but the value of money will drop. I have to hope the BoE keep printing money like there is no tomorrow until my massive mortgage seems to be tiny.

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LANDLORD X

Dec 23, 2011 at 14:57

@ Jonathan

Indeed, high inflation coupled with negative interest rates on debt will make those with geared investments rich...as their debts are wiped out by inflation

When will interest rates rise? When politicians grow a brain and learn to control Govt spending. And when banks cease to make record profits by acquiring cash at 0.5% and lending at 5%. Don't hold your breath

In fact, financial repression of this sort will probably go on for years and years as the Govt is forced to try to inflate away its debts...and the debts of everyone else...by destroying the value of fiat currency

So bad for savers, pensions, people without debt, house prices

Great for landlords with geared investments

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Jonathan

Dec 24, 2011 at 18:54

landlord x

It's unlikely the government will put interest rates up voluntarily as the would have to pay that on new bonds. Better to print a load of money and use it to fund the government by buying its own debt. So it will be more inflation and more devaluation.

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