Axe to Drop on Interest Only Mortgages

by Mark Johnston

Thousands of borrowers took out interest only mortgages at the height of the property boom as a way of borrowing more money to buy expensive properties. But now tighter regulation means that these types of mortgages will become obsolete.

Mortgage lenders have warned that they will have no choice but to withdraw from the interest only mortgage market if the planned tighter comes into force. This will effect both lenders business and customer choice making it even harder for some to get onto the property ladder.

The city regulator, the Financial Services Authority has plans to introduce new measures which will force lenders to toughen up their assessment criteria for interest only mortgages. Part of these new rules will make banks and building societies test a customers affordability on a repayment basis instead of an interest only basis.

Although the full extent of the new regulations have not yet been published, mortgage lenders are expected to carry out affordability checks on an annual basis and reviews of the mortgage every five years.

Peter Williams, executive director of the Intermediary Mortgage Lenders Association, said: “The FSA has set out to create a flexible market that works better for consumers. In IMLA’s view, its potential treatment of interest-only loans could achieve the very opposite, not least through the increased regulatory burdens and risks the regime will pose for lenders. The FSA needs to find a balance in what it proposes so that lenders are still able to offer interest-only loans and thus meet a diverse range of customer needs.”

Last month Michael Coogan, director general at the Council of Mortgage Lenders (CML) said: “We do not want to see measures that would effectively regulate them out of the market, and we believe it is possible to address the FSA’s concerns, without imposing costs and requirements on lenders and borrowers that are likely to prove to be unacceptable.”

The Council of Mortgage Lenders (CML) has highlighted that their members would not want the extra burden of even more regulation and checks that would make if impossible for them to operate in the market. They warned that introducing these measures would mean an end to interest only mortgages and a further reduction in choice for customers.

At the same time, Lloyds have contacted mortgage brokers to tell them to introduce checks to make sure that customer that apply for an interest only mortgage have a way of repaying the loan.

The banking group plans to introduce spot checks on interest only mortgage which will see them select applications at random and ask brokers to supply evidence that a repayment plan is in place.

The  charges are part of an overhaul by Lloyds of their interest only mortgage offering. They have already increased the interest rate of these types of mortgages over those of capital repayment by up to 0.2%. They also reviewed the things that they would accept as a suitable repayment plans. Some fo the methods that got the axe were the sale of a business, an inheritance or the sale of the property against which the mortgage is secured.

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