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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.
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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