However, over the last decade capital and interest repayment mortgages have routinely accounted for the majority of mortgages sold.
Despite most mortgages being on a capital repayment model, the FSA appear certain to consult later this year with proposals that will attempt to reduce the size of the interest only market.
The FSA is concerned that some borrowers on an interest only arrangement do not have an adequate repayment strategy placing them and their lender at risk. Though the concern is a reasonable one, there is no evidence of mass consumer detriment or legions of interest only borrowers failing to make repayments.
Of course there are inherent risks with interest only mortgages but lending is a risk based business after all. An exploration of the risks is sensible but we must be clear as to what it is we are trying to achieve.
For mortgage customers the risks of interest only products can be significant although there are a number of steps that can mitigate the risk, and make it a very worthy option. The biggest risk is that the borrower is unable to repay the loan at the end of the mortgage term. Having no repayment strategy clearly leaves the borrower exposed at the end of the term, and relying on house price rises to repay the mortgage.
Though this may be enough, it may leave the customer without enough funds to purchase another property if that is their intention. For lenders the risk is that at the end of the term the borrower is unable to repay the loan, even after the sale of the property.
A repayment strategy mitigates the risk of loss.
The FSA wants to see lenders take greater responsibility for checking and monitoring that a valid repayment method is in place. This includes periodic checks throughout the term of the mortgage.
The BSA can not see the logic of this. It is impractical and stretches the role of the lender to providing investment advice – something it should not be doing. Lenders should not be expected to advise customers on the expected performance of repayment methods – either explicitly or implicitly.
The lender has a clear role to explain the risks to the customer and point them to seek expert advice so that they can choose a suitable repayment strategy based on their individual circumstances and needs.
There is of course another reason why the FSA are keen to limit the interest only market. The FSA is right to look at the role of interest only mortgages in light of its own proposals on affordability set out in its responsible lending consultation paper this July.
However it must do so to ensure customers can access the right range of products that best meet their needs and budgets. It would be wrong to make changes to the way interest only mortgages work or are sold simply because the perception is that they may be (or are currently) used to overstretch affordability.
Rather, such loans can genuinely represent a cost efficient and low risk option for many borrower types. Generally, interest only mortgages can be safe and worthy products that provide valuable choice to consumers to better able them to get a suitable mortgage product.
There is a strong case for interest only mortgages for certain customers such as first time buyers and high net worth customers.
We disagree with the rationale that regulation of this product area is required, and do not see the need for product level regulation more generally. The FSA must be careful in how it proceeds as it is in danger of setting an unwelcome and unhelpful precedent.
