As a lender it is vital you have both eyes firmly locked on what is coming over the horizon in terms of both the market and regulation.
The Financial Services Authority has been unfairly criticised over its Mortgage Market Review – for closing the stable door after the horse has bolted, particularly with regard to the specialist market where lenders have already pulled back from sectors such as sub-prime and self-cert. that lenders are not waiting for the FSA’s rules to be formalised and are looking to put in place processes which potentially are not likely to be covered by the MMR.
This has clearly been the case with their approach to interest-only mortgages. Earlier this month Coventry Building Society scrapped interest-only for first-time buyers while Northern Rock dropped maximum LTVs for the facility down to 75% and Lloyds Banking Group won’t offer interest-only products for loans over £500,000.
Clearly, lenders are not waiting around when it comes to interest-only and given the FSA’s take on such mortgages – as detailed in its responsible lending paper – this is hardly surprising.
Interest-only for buy-to-let mortgages still makes sense but the FSA believes offering interest-only residential mortgages requires a great deal more thought on the lender’s part, particularly around verified repayment vehicles and responsibility in ensuring these can pay back the mortgage on time.
Residential interest-only mortgages have been described as a potential mis-selling scandal
To ensure this lenders are going to need to put much more resource into the scrutiny of interest-only borrowers with the FSA perhaps calling for regular or even yearly reviews of borrowers’ repayment vehicles to ensure they are on track.
With this kind of requirement the cost for lenders to provide interest-only mortgages is going to rise considerably.
At this stage it is not certain whether this kind of stipulation will be brought in retrospectively, compelling lenders to review outstanding interest-only mortgages – not just the new ones they offer post-MMR.
So lenders are looking to put their interest-only houses in order right now and it would be wise if advisers did the same.
I have already heard residential interest-only mortgages described as a potential mis-selling scandal, and as unlikely as this may seem I’m old enough to remember a time when it was unthinkable that there would be a problem with endowment sales.
The facts are that the FSA is aware of the large number of interest-only mortgages sold since Mortgage Day and is concerned that within the next 20 years or so we will see significant numbers of borrowers with no plans in place, apart from selling the property, to pay off the capital.
Who knows what house prices may do. The regulator is understandably perturbed that we will have borrowers whose homes are not valuable enough to pay off the capital – or they will be able to pay it off but with not enough left to fund another home to live in.
Lenders are aware of this and are moving to address these potential changes. One thing is certain – it is unlikely any lender will want to be left behind so we should expect further movement on this issue from the lending community in the months ahead.