CML suggests alternative to killing-off interest-only
Share
The Council of Mortgage Lenders has submitted its response today to the Financial Services Authority’s consultation paper on interest-only mortgages, in which it suggests an alternative to killing-off interest-only mortgages.
The CML believes that the compliance costs for lenders of annually checking the existence of borrowers’ repayment methods, and the regulatory risk of the lender making a judgement on the adequacy of the repayment method, would prove prohibitive.
It has proposed an alternative approach that it says will strengthen lender oversight and have more tolerable compliance costs and regulatory risks.
The key points of this are that:
- The borrower should retain responsibility for repaying the capital at the end of the term.
- The lender should have a policy on the repayment methods it will accept and how it will control for higher risk methods.
- The lender will be required to validate the existence of the repayment method during the application process.
- Where the original term is over 20 years and the borrower remains on interest-only the lender should then seek to re-validate the existence of a repayment method approximately seven years before the end of the term. Contact with higher risk borrowers will be prioritised.
- Where the original term was less than 20 years, it would be appropriate to seek to re-validate approximately two-thirds of the way through the term.
- Regardless of the original term, where the mortgage contract extends beyond a reasonably anticipated retirement age for the customer, the lender will seek to re-validate the existence of a repayment method approximately 10 years before retirement age.
- If the borrower does not have a repayment method in place the lender will agree appropriate remedial action, taking into account the affordability of the revised monthly repayment.
Finally, in the annual mortgage statement the lender will remind the borrower of their responsibility to have adequate provisions to repay the capital at the end of the term and, in particular, the need maintain their repayment method.
It wants the FSA to require a declaration in the KFI and/or mortgage offer that states that the customer retains responsibility for the repayment of capital and therefore the performance of the repayment method.
It believes that re-validating the existence of the repayment method approximately seven years before the end of the mortgage is commensurate to the risk, as the average borrower holds their mortgage for 9.4 years and in that period is likely to make contact with their lender for one reason or another.
It says at no point should the lender be required to take responsibility for the anticipated performance of the repayment method.
It estimates that there are just over 3.75 million first-charge mortgages, worth around £470bn, with at least some interest-only component.
The proportion of interest-only sales is consistently higher on introduced business compared to the direct channel.
This in part can be explained by the potential for intermediaries to advise customers on suitable investment products as a repayment method, the FSA has also expressed concerns that intermediaries have recommended interest-only products to get around affordability restrictions.
The CML says consequently, any restrictions on interest-only will have a significant impact on the intermediary sector and in particular the ability to advise on and sell suitable repayment methods alongside the interest-only mortgage.
If you enjoyed this article, sign up here to receive daily email updates from Mortgage Strategy and Follow @mortgagestrat
View results 10 per page | 20 per page
Readers' comments (14)
colin | 30 Sep 2010 3:58 pm
some proactive and sensible thinking, to kill off interest only is stupid, i appreciate the need to have a suitably robust method of repaying the debt, but an outright ban is tantamount to the FSA becoming a dictatorship.
Interest Only is the correct method for some clients, and if they chose that route they need to take responsibility of that decision.......with the correct disclaimers and regular contact they cannot hide behid ignorance
Unsuitable or offensive? Report this comment
James Lindon-Travers | 30 Sep 2010 3:58 pm
I think what the CML proposes is what we would call traditional underwriting!
Unsuitable or offensive? Report this comment
Hypothecation | 30 Sep 2010 4:00 pm
Sorry - but isn't that what a sensible lender should have been doing all along?
Unsuitable or offensive? Report this comment
Ancient Wisdom...is a mortgage broker in N3. | 30 Sep 2010 4:00 pm
Mortgages are the lowest risk for any institution as the property is their security. If they dont repay the loan, its owned by the bank!
Life insurance should be made compulsory and assigned to the lender - if CML want to go back to the old ways (the worked) then they should do so properly.
Further evidence that putting off buying property has never been of benefit to any borrower long term. Now its higher deposits and repayment only - or rent for the rest of your sorry, debt ridden, high tax paying life in the UK.
Im just thankingd I'm not a developer or borrower in Ireland right now!
Unsuitable or offensive? Report this comment
Mike Fitzgerald | 30 Sep 2010 4:02 pm
I think that the CMLs latest suggestions to the FSA on interest only mortgages make a lot of sense.
I am glad that they have widened the debate on Interest only mortgages as to ban them across the board would be shortsighted and would greatly reduce consumer choice on how they repaid thier loan.
However i also feel that a cap on the loan to vale would help to retain the interest only facilty.So a 90% mortgage could for example be structured as 10% repayment and 80% on interest only.This report by the CML is very helpful to both brokers,lenders and consumers and lets hope that there is now a much deeper debate on the way forward.
Unsuitable or offensive? Report this comment
john | 30 Sep 2010 4:04 pm
Interest only and overpaying it is a vastly superior method of paying off a mortgage - for the right client. Never a FTB or a client who has no concept of the issue. It must be allowed to stay, as it is a very useful method.
Unsuitable or offensive? Report this comment
Avenue & Co Private Finance | 30 Sep 2010 4:08 pm
Sound like the 'old fashioned' method of lending returns. The story begins like this:
Go to your local bank with whom you have a 10-15 year history, along with proof of your 20-25% deposit (to show you can save). Turn up well presented, with your P60's, salary slips and bank statements, your partner (wife, husband or same sex) and explain to the manager why you qualify for a mortgage. They then think about it, come back to you after a week and say 'Yes - repayment loan, 25 yrs max, your income stacks up, the property price is within 3.5 x income and take out life cover and assign to the bank for 25 yrs' as security. Congratulations - your loan is approved, see you in 12m for your review.' Then in 7 yrs, repeat exrcise for a larger home, this time with 2 kids on tow, slightly bigger belly and less hair/grey hair.
It worked back then, it will work now.
The End.
Unsuitable or offensive? Report this comment
Anonymous | 30 Sep 2010 4:13 pm
The only thing that needs killing off is the FSA and that would solve a lot of the problems that exist in the recovery of the mortgage market. As I have stated in my previous comments, there is nothing wrong with "interest only" if it puts the first time buyers on the housing ladder or helps an existing borrower keep their home.
Unsuitable or offensive? Report this comment
QuoMan | 30 Sep 2010 4:28 pm
MCOB already covers this by stating for annual statements:-
"This is an interest-only mortgage. Your mortgage payments do not include the costs of any savings plan or other investment you may have arranged to build up a lump sum to repay the amount you borrowed. It is important to check regularly that your savings plan or other investment is on track to repay this mortgage at the end of the term."
Is it me? What is wrong with borrowers being responsible for their own actions - provided they get sufficient warnings?
It is down to the Advisor/Borrower to ensure that this is clearly understood.
Unsuitable or offensive? Report this comment
AP | 30 Sep 2010 8:37 pm
How about treating customers like adults? I don't need my family home when I retire, I already own another property outright for that eventuality. I am quite happy to sell up to pay off my mortgage and as there is 50% equity even after the last few years there is hardly a risk to the bank is there, especially as I have other assets as well. Why should I be forced to do something that is absolutely the wrong thing for me? The FSA is applying lowest common denominator thinking to a sophisticated market.
Unsuitable or offensive? Report this comment