‘Don’t stifle interest-only’, market tells FCA

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The Financial Conduct Authority has been urged not to stifle fresh interest-only lending as it launched its third review of the sector in five years last week.

The regulator unveiled the latest thematic review in its 2017/18 business plan.

The report says: “Around 1.8 million UK homeowners currently have outstanding interest-only mortgages (excluding buy-to-let), and many do not have an appropriate strategy to repay them.

“We will look at how firms treat borrowers whose interest-only mortgages are approaching maturity and their ability to ensure these customers are treated fairly.

“This will include those interest-only mortgages that are due to be repaid by 2020 – where borrowers have the least amount of time to find a solution.”

Mortgage Strategy understands the FCA will revisit its 2013 interest-only study on whether consumers could repay the loans. At the time, the regulator urged lenders to contact borrowers to check their repayment plans.

Council of Mortgage Lenders spokesman Bernard Clarke thinks lenders are well prepared for the review. He says: “We have been working with our members to ensure that they continue to maintain effective communication strategies, contact interest-only borrowers and remind them that they need to have a repayment plan in place.”

Hometrack director of research Richard Donnell adds: “Lenders are clearly doing a good job in engaging with customers and reminding them of their obligations. I think what the regulator is worried about is interest rates going up. Once they go up, can these people afford those mortgages?”

While interest-only took a hit from factors such as the decline of endowment mortgages and the Mortgage Market Review’s tougher repayment rules, experts say stern regulatory scrutiny continues to deter lenders.

In 2012 former FCA chief executive Martin Wheatley said the loans could be a “ticking timebomb” because of a wave of maturing loans with no repayment strategies.

The FCA followed this with reviews into interest-only loans in 2013 and 2014, then launched a third last week.

Moneyfacts data shows 27 lenders now offer interest-only loans, almost unchanged from the 23 offering the loans when MMR rules were introduced in April 2014.

Interest-only loans make up around 1 per cent of total mortgage lending, down from a peak of 83 per cent in 1988 (see graph).

Maxwell Moore director and former Dudley Building Society head of credit Jonathan Moore says: “The regulator in its genuine and rightful bid to resolve historical issues has probably given conflicting messages regarding new interest-only borrowing.

“There is a place for new interest-only borrowing, and there has been a yoyo effect that has left lenders confused. It would be a shame if borrowers in the future had fewer options because some lenders were reluctant to enter into it.”

Chadney Bulgin mortgage partner Jonathan Clark says interest-only is “still a valid tool for more financially astute customers but the constant scrutiny from the FCA is surely stifling lenders willingness and ability to offer such products”.

GPS Economics director Gary Styles says interest-only loans “make perfect sense” for some borrowers, including the financially savvy and those with rapidly growing incomes.

He says: “There is a balanced argument here. But the trouble with our industry is that it’s either everything or nothing when it comes to interest-only. We have a scenario where everyone gets behind it, then we have two horrible reviews and suddenly everyone thinks it’s the worst thing in the world.”

The CML’s Clarke says: “The FCA has ack­nowledged that, in the right circumstances and for the right consumer, interest-only is a reasonable option. It will be very interesting working with the FCA on this latest study and seeing what views on the state of the market emerge from that.”