In its recent Mortgage Market Review, the Financial Services Authority (FSA) set out a number of proposed rules and checks to ensure responsible mortgage lending and borrowing. The proposed changes target some of the mistakes that were made in the run up to the credit crunch and aim to ensure that in future, banks lend responsibly and customer only borrow what they can afford.
Two key areas that the FSA is focusing on are affordability (how lenders assess how much someone can borrow) and interest only loans. According to FSA figures, at the height of the market around a third of all new residential mortgages were sold on an interest only basis, with around three quarters of these having no specified repayment vehicle.
The fear is that thousands of borrowers are only paying the interest on their mortgages and will not be able to afford to repay the debt at the end of the mortgage term. One suggested way to crack down on the use of interest only is to force lenders to always assess affordability on a repayment (capital and interest) basis, even if someone is taking out an interest only mortgage. Another is to set tight rules on what is an acceptable method of repaying a mortgage – in particular, not allowing people to just rely on their house increasing in value or downsizing at some point in the future.
Although these proposals are still only at the consultation stage, many lenders have already been putting restrictions on their interest only lending, for example insisting on a bigger deposit and not allowing certain repayment vehicles, such as an inheritance.
A lot of what the FSA is trying to achieve sounds sensible, but some of its proposed solutions involve imposing a one-size-fits-all restriction on how much someone can borrow or how they should repay their debt. If these were implemented, they would severely restrict the options of thousands of borrowers whose circumstances make a standard repayment loan unsuitable for them (as well as leave many existing borrowers unable to move their mortgage to a new deal).
In fact, The Council of Mortgage Lenders (CML) has this week said that interest only mortgages could effectively be killed off by the changes – a result that would be damaging for both the mortgage market and housing markets.
There’s no denying that interest only has been used by some borrowers simply because it allowed them to borrow more than they could afford on repayment, but for many other people it is a sensible and suitable option that gives them flexibility and a mortgage that fits their circumstances.
If the financial services industry genuinely wants to put customers in a position where they can make sensible and responsible financial decisions, then imposing strict and inflexible lending rules is not the best way to go about it.