However, the regulator has commented that "the lender cannot be held responsible if what appears to be a credible repayment strategy at the point of underwriting does not deliver" and Martin Wheatley has acknowledged that "I don’t know that we can solve the problems of the last 20 years."
In today's paper, the stance taken by the FSA was to implement a 'mid-term review' where the lender checks on the borrower's ability to replay a set amount of time after the mortgage has begun, and goes as follows:
"The rule merely requires the lender to make contact with the borrower, to check if the repayment strategy is still in place, and check whether it is still reasonable to expect that it has the potential to repay the mortgage. So while the lender may choose to request documentary evidence of the repayment strategy from the borrower, there is no specific requirement for them to do so – therefore they could rely on information provided by the borrower.
"We continue to believe there is value in the mid-term review, which will alert both parties to potential issues at a point where there is still time to consider remedial action – rather than waiting until the end of the term. This may be the catalyst that prompts some borrowers to take action. Even relatively minor changes (such as small overpayments made over several years) might significantly improve the borrower’s position and range of options by the end of the term.
Richard Sexton, director of e.surv chartered surveyors, commented:
“There isn’t an easy way to deal with the interest-only legacy. The problem with the FSA’s interest-only proposals is they just close the door after the horse has bolted. They don’t solve the real problem, which is the outstanding balances of existing interest-only mortgages, not assessment criteria for new ones.
"The problem built up in the mid-to-late 2000s, when up to a third of all mortgages were interest only. Around three quarters of these have no specified repayment strategy. Worryingly, the FSA has said the assessment of these interest-only mortgages was ‘less robust’. Put simply, swathes of borrowers were granted interest-only mortgages when they couldn’t afford them. Lenders and borrowers were betting that house prices would carry on going up and the balance would be paid off that way. It was a gamble that has badly backfired. Now house prices have fallen sharply, lenders and borrowers are up the proverbial creek without a paddle.
"There are already around £120 billion in interest-only mortgages with no repayment plan to mature by 2020. Most of these mortgages were granted in the mid-to-late 1990s, so don’t even reflect the most dangerous and unsustainable period of interest-only lending in the mid-to-late 2000s. The outstanding balance of mortgages granted just before 2008 will be even higher than £120 billion, and more of the borrowers will be unable to repay the mortgage. Reviewing repayment strategies half way during the mortgage term won’t solve the problem. The FSA is saying it’s up to the borrower to find a repayment strategy. That’s a tectonic problem for the market. A big chunk of interest-only borrowers have no means of repaying, particularly the ones who got an interest-only mortgage when the market was basking in the glow of unsustainably easy access to credit just before 2008. Falling house prices have eaten away chunks of equity, and high inflation combined with low savings rates means it will be impossible for lots of borrowers to repay their interest-only mortgage before it matures.
"Today, lenders are much more considered in their approach to interest only lending. There remains a place for it in the market if done responsibly. However, if more lenders pull out from the sector, we may see a domino effect where most major lenders shelve their interest-only products.”
Mark Blackwell, managing director of xit2, comments:
“These proposals and supporting information reflect the scale of the interest-only problem. Lenders are working hard scaling back lending to borrowers who can’t meet tougher affordability requirements.
“This doesn’t address the borrowers already out there – the ones who have no means of repaying their interest-only mortgages. The block of interest-only mortgages issued in the mid-2000s represent a dangerous legacy from the pre-crunch boom. Around £116 billion of interest-only mortgages with no repayment vehicle are due to mature by 2020. Most of those mortgages date back to before 2000. But between 2000 and 2008 there were even more mortgages granted to borrowers with no apparent repayment plan. Plenty of these were provided to sub-prime borrowers. The £116bn figure is very conservative. When interest rates rise it will exacerbate the problem and challenge already stretched household incomes.
“These proposals have no new measures to tackle the problem, focusing only on new interest-only mortgages, and they aren’t the real issue. Borrowers themselves will have to shoulder the burden of these loans. Struggling borrowers need to be identified and proactively helped in dealing with the problem.”
Dan Maskell, MD of Finance Planning Group, is also concerned for those who already have interest-only mortgages:
"We feel that there is a place for interest-only mortgages and it's disappointing that lenders have gone so far in restricting their use. They are particular useful for the self-employed and salaried employees who receive bonuses and want to overpay but are restricted by the normal penalties for overpaying. Interest-only mortgages also appeal to families who have a large deposit and want a big house knowing that they will downsize when the children fly the nest.
"We're particularly concerned for people that currently have interest only mortgages that are now effectively mortgage prisoners because they cannot switch to a more competitive rate or afford to move to full capital and repayment mortgage. In these cases, a good solution would have been the ability to move those borrowers to a part-repayment, part-interest-only mortgage. This would help people move along the right track."
