MMR: Property should not be used to repay interest-only says FSA
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In its responsible lending paper today the Financial Services Authority says it plans to consult on any rule changes to interest-only mortgages later in the year, but a valid repayment vehicle should not be house price inflation or downsizing to a smaller property.
It says there could be some circumstances where sale of property could be accepted but it is looking to set a threshold below which the sale of property is accepted, either by setting a maximum LTV or a minimum amount of equity in the property from the outset.
Its data shows that 1.1 million interest-only mortgages with no specified repayment vehicle originated between Q2 2005 and Q4 2009 are due to mature in the decades 2024-2033. It wants to make sure a genuine repayment vehicle is in place.
It believes there are customer types for whom interest-only mortgages may be particularly relevant, such as:
- Consumers who have investment properties or second homes that they can sell to repay the capital without risking their main residence;
- First-time buyers who can afford the mortgage on a repayment basis but want to spend some of their income on home set-up costs during the initial period of their mortgage.
- Older consumers who have a lot of equity in their property, who wish to repay the capital through selling their property, either on death (through a lifetime mortgage), or by downsizing to a smaller property.
- High net worth consumers who have the means to repay capital through realising their assets; and financially capable consumers who have made firm arrangements to repay the capital, such as through investments.
It says it is also considering the effect of its proposals on existing interest-only customers and will update on this further on in the year.
